#CRE Lessons Learned in 2015

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With the end of 2015 firmly within reach, I thought it necessary to recap the three lessons that I learned in 2015.

The first two lessons are related as I will discuss. The third lesson was not really a lesson at all but a confirmation of what I had been told for years. But the doing is so much better than the hearing.


How to market a misfit toy. Industrial real estate vacancy in Orange and Los Angeles counties is at record low percentages  - as I have opined for several months now. Currently 97 of every 100 manufacturing or distribution buildings are occupied. The buildings that do find their way onto the market - if they are modern, amenity filled, and priced fairly - lease or sell within the first week they are available. The ones that get overlooked are akin to that XXXL #8 Laker's jersey - there are very few occupants to which the building appeals. The challenges with marketing such an albatross are plentiful. But I believe that this year I learned how to successfully market these misfits. First, expectations must be clearly communicated to the ownership. Even if the owner is unaware of the deficiencies of his building, he needs to hear the truth. Second. you must be "open for business". If a tenant or buyer happens along, you must grab them - another may not wander by for several months. Third, some misfits can be remedied with a minor change - the addition of a loading dock, the removal of some office space, a creative transaction structure. Last, feedback is critical. If your building is overlooked or passed in favor of another - find out why. One of the ways I insure that I get instant feedback is covered in the next paragraph.

Showing up is 80% of success. I make sure that I attend the tour when one of my listings is shown. Think about it. If you represented an occupant, would you send him to a building to tour alone? Of course not. So why is attending a showing on behalf of your owner any different? Frankly, not attending is derelict. If you attend the tour, you can make sure that the prospect has a current brochure, that the prospect and his broker are in tune with your owner's motivation, and that you are ready to react to offers. Watching a prospect walk through a building is illuminating. You can generally tell if there will be any interest in leasing or buying the building.

Becoming a grandparent is so AWESOME! Our new little grandson arrived on September 2. He is now three and a half months old and his smile can melt your heart. He stays with his Nana during the day and his Mom or Dad pick him up in the afternoon. We see him on some week nights. He is simply delightful. Everything that folks tell you about grand parenting is TRUE!

Is your #CRE Solution Contained in the Problem?

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I had a good week! As weeks in my business go, this week ranks near the top. I closed a large deal, got a contingency released from a signed lease which allowed the owner to pay us, and entered contract on a building I have marketed since March - Bravo!

As you can appreciate, the reality of the week is still fresh but I had a chance to reflect upon some of the events that culminated in this week's happy dance.

All of the aforementioned deals contained a MAJOR problem, objection, or roadblock that prevented the completion. In short, there were issues! I believed that the ways in which the challenges were overcome was post worthy, so here goes. Spoiler Alert - ALL of the problems contained the solution.

Contingent Lease: We built a contingency into a lease deal because we were told, by the city, that a parking variance was needed for our use of the building. My guy signed the lease with the comfort of knowing if he couldn't get the parking issue resolved, he could walk away. I had never heard of a parking variance for a standard industrial use in an appropriately zoned industrial building - but that is a topic for another day. Initially, the city told us we needed 112 parking spaces. The building had 55. We only had 38 employees. Hmmm. The problem was that we overstated the amount of the building that would be used for manufacturing. The solution was to conform our layout to properly represent the manufacturing space, voila - parking issue solved, contingency removed.

Building too big: A client needed to expand his operation. I sourced, what I believed was the PERFECT building. I confirmed the availability, pricing, and touring instructions. My fingers quivered as I dialed my client's number. My submittal was greeted with "the building is too big for my use". Once again, the solution was contained in the problem. You see, a portion of the property was leased short term. If we could convert the short term lease to a long term lease and my client could occupy the balance of the building, then the issue of the building being too large would evaporate. Low and behold, the short term guy was thrilled to extend his lease, the property became "smaller" and my client is the proud new owner.

Price too low: I have been marketing a building, that is a bit of a misfit toy, since March. The owner is delightful, however and I really wanted to get the building sold for him. We have had three false starts - which are painful. Another group has been orbiting since August, but could not reach our pricing expectations. My guy was facing a costly move to a smaller building once I sold his building. The problems were the price that the buyer was willing to pay and the expense of moving my guy's operation. We solved the problems buy constructing a sale to the buyer, at his price, in return for an advantageous lease of a portion of the building for my guy.

If you have a problem, don't despair. The solution is contained in the problem if you look hard enough.

#CRE Due Diligence - Look into it!

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Some of you are old enough to remember the Saturday Night Live Weekend Updates with Kevin Nealon.

Occasionally, David Spade would give a brief Hollywood gossip minute and use the line of "...look into it!"

While discussing every Hollywood loser believing they had a shot at dating Michelle Pfeiffer, David said "you don't, it's called reality...look into it!"

Well, believe it or not, there is a commercial real estate parallel. It's known as due diligence...look into it! I love the double entendre also.

So what exactly is commercial real estate due diligence, and why should you care?

In short, due diligence is a period of time, within a purchase contract, that you as the buyer, are allowed to study the property you are buying. Generally, this period of time is "free" - meaning that if something is not as represented, you can walk away with no obligation.

Certain things in your assessment are a given - does the property meet your needs as an occupant? Can you qualify for financing? Will the property appraise at the price that you have agreed to pay? Is there any environmental contamination lurking beneath the soil?

Other elements of the purchase are not as clearly defined - what is the condition of the roof, air conditioning, truck doors and pavement? Will the city allow you to operate in the building without any special permitting? Are the offices in the building built to code? Does the path of travel from the street to the building conform with the requirements of the American with Disabilities Act (ADA)?

The onus is upon you as the buyer to understand what you are buying. In most purchases of commercial real estate, the seller does not warrant the condition of the property and sells the property to you in the property's "as-is" condition. Consequently, you must have a proper structure of your due diligence to insure that you don't get stuck.

I would recommend that you consider the following things to make sure that you have the ability to "look into it".

Time frames: Loan approval and the components of that approval - appraisal, environmental, financial take time. In most instances, 45-60 days - if you and your lender are in sync and you provide your lender a complete package of information for your loan approval. Make sure that your agreement with the seller allows you adequate time for your loan approval and that you can extend the time frame if needed. While your lender is crunching the numbers, the appraiser is scouting the market for comparable sales, the enviro engineer is reviewing the records of previous hazardous uses; you and your team can busy yourselves conducting the balance of the investigation.

Responsibility: Ultimately, the responsibility of analyzing the purchase is yours, but you will want to engage a bevy of consultants to provide reports for you. Your lender will generally hire the appraiser and environmental engineer. But, I would suggest that you have a commercial building inspector check out the building. You probably will want your lawyer to review the title report and discuss with you the most advantageous ownership entity for you. If you are planning to make changes to the building, an architect's guidance is invaluable. The architect can also help you with city permitting and ADA path of travel concerns. Building those new offices or adding a truck loading dock will require a licensed general contractor. Team with one early - maybe have the contractor check out the condition of the building for you as well as the commercial inspector.

Recourse: Typically, you conduct your due diligence - loan, property condition, title, permitting, etc. and conclude that you are a go or no go for launch.  Make sure that your agreement allows you to cancel the sale, for free, if something is amiss - the property is environmentally contaminated, cannot be financed, is too expensive to improve, or the city will not allow you to occupy the building with your use.

5 Overlooked Reasons You Hire a Commercial Real Estate Professional

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Professional services are expensive! In many cases, hundreds of dollars an hour.

Generally, the level of experience is coupled with a high hourly fee structure. I am talking about consulting, tax, legal, banking, and wealth advice.

The more experienced your service provider is, the more you pay for her services - except with commercial real estate services.

Your commercial real estate service provider could have five minutes or fifty years of experience and you pay the same percentage of a sale or a lease if you hire him to sell or lease your building.

So aside from her experience, what are the overlooked reasons for hiring a commercial real estate broker?

The value of his network. Need a contractor to bid a tenant improvement - check! How about a consultant who will walk you through the maze of city requirements - check! What about a lender that can look past a couple of minor credit blemishes and get your loan done to purchase that building - check! Your commercial real estate professional can be a treasure trove of referrals for folks that can solve your problem.

His knowledge of the market. Two buildings of the same size appear in the comparable sale or lease set. One took five months to sell and the other was sold in thirty days. What was the difference? This is the type of market knowledge that can help you get your building leased or sold quickly.

Transactional expertise. Want to take your equity and accomplish a tax deferred exchange through  chapter 1031 of the IRS code? How would you structure a lease with an option to purchase so that you are protected? If you award free rent to a prospective tenant, are you better served calling that concession "free" or "abated" rent? A professional can guide you through all of these variables and/or put you in touch with the professional service providers who can - see The Value of His Network.

Relationship with other commercial real estate professionals. Are you getting the true scoop on the interested parties that tour your building? How is your broker's reputation with his competition? Is your guy cooperative with his fellow brokers? Roughly 75% of all commercial real estate transactions are concluded with an owner rep AND an occupant rep. Make sure that your representative plays nicely with others.

Problem solving ability. Potential environmental contamination, city compliance issues, a building sprinkler system that is insufficient, seismic studies for your racking, building permits for new offices, a use of your building that requires a conditional use permit from the city, Americans with Disabilities Act conformance. ALL of these hurdles can stop a deal in its tracks if your professional is ill equipped to help you navigate the rapids. Make sure your provider is experienced in real problem solutions.

Buying Commercial Real Estate - In the Future

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Owning a building is in your future, but not in your immediate future.

You have carefully considered your company's growth projections, bankability, and available cash and have determined that leasing a building makes more sense today than owning a building.

You do, however, want to reserve the opportunity to own the building you are leasing.

So what alternatives are available to you if you want to lease today and potentially own in the future?

You have one of several ways to structure future ownership into your lease agreement.

Option to Buy. An option to buy grants to you as the tenant the right to purchase the building in the future. Some options include a fixed price. Other options are based upon the market price at the time. Generally, a market option has a mechanism included on how the market price is determined. Options to buy are typically personal - meaning that they cannot be assigned to another person. Time is of the essence with an option to buy - you must declare your intention to buy (exercise the option) within a certain time frame or the option can go away. Options to buy benefit you as the tenant more than they benefit the owner. You are in control of when and if the option is exercised and the owner must oblige your desire. Sometimes, the rent you pay prior to exercising your option can be applied to your purchase price. Additionally, some owners require option consideration - a sum of money to reserve the option - which is lost if you decide not to buy the building.

Right of First Refusal. A right of first refusal gives you the right to match an offer to purchase that the owner receives. Most of the time, the owner must present a bona fide offer to you from a third party and you have a certain number of days to meet the terms of the offer. The marketplace dictates the timing of the right which is the biggest downside of a right of first refusal - you don't control when you get to buy the building - only that you get a crack if the owner decides to sell.

Right of First Offer. A right of first offer gives you the first kick at the can in the event an owner decides to sell his building. Similar to a right of first refusal, the timing of a right of first offer is dependent upon the motivation of the owner and not necessarily when you are ready willing and able to buy the building.

An unwritten agreement. The reality is that if an owner wants to unload the building and you are his tenant, he will generally approach you first to gauge your interest in buying the building. After all, you have occupied the real estate for a period of time and have your operation entrenched in the building. You are generally his best buyer.

5 Things a Commercial Real Estate Owner Considers - In a Deal

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We sat in front of a tenant this morning. She is considering leasing a space and asked us how negotiable the lease rate might be. Our response to her was post worthy, so here goes.

An owner of commercial real estate is concerned about several things in considering a tenancy. His concerns - and the way in which the tenant addresses these concerns - will translate into his willingness to negotiate.

Financial capabilities. An owner wants to receive his rent - above all. The stronger a tenant is financially, and the tenant's willingness to share that financial capability early in the negotiations, will result in an owner that will greet the tenant with open arms. I generally recommend submitting financials along with the initial proposal to lease.

Use of the building. A call center that will overload the parking or an automotive use that will clutter the parking lot with broken down vehicles will not be met as favorably as a marketing firm with few employees or a distributor that will install a few racks in the warehouse. Financial solvency is important, but the use to which the building will be put is equally important.

Abated rent. How much time lapses before the income stream commences? If a tenant is willing to sign a five year lease yet asks for six months of abated rent, the income stream is delayed for six months - and - the concession is a ten percent discount.

Tenant improvements. The less you ask an owner to do the better. I discussed this at length in this post. Generally, owners would prefer to keep the investment in their buildings to a minimum because they rarely get any return - more rent - for their investment. The tenant improvements I reference would exceed a normal refurbishment of paint and carpet.

Length of lease. An owner is less willing to cave on the rent if you are unwilling to commit to a term of lease. Depending upon the size of the building, most owners prefer a three to five year lease commitment from a prospective tenant. Think about it this way. Turnover is expensive for an owner - with abated rent, commissions, tenant improvements, downtime. If the term of lease is long term, this turnover can be avoided.

Use what you have at home #cre. TUESDAY Traffic Tips

Use what you have at home #cre. TUESDAY Traffic Tips. One of my wife's favorite sayings is to "use what we have at home". There is a practical connection with commercial real estate as well. I discuss this and so much more in this week's TUESDAY video tip for #cre.

How Commercial Real Estate Leasing Fees Are Computed and Paid

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One of the biggest differences between commercial real estate agents and our residential brethren is that leasing commercial real estate is a big part of a commercial real estate broker's practice.

 

Generally, residential real estate agents sell houses. Certainly, they can lease houses as well but typically they specialize in selling them.

 

This post will provide an easy guide to how commercial real estate leasing fees are computed and who is responsible for paying them.

 

The fees (leasing commissions) work this way:

• Fees are paid by the owner of the building after the lease is signed.
• The tenant has no obligation to pay the fees. A misconception occurs, frequently, that somehow the rent that the tenant pays is inflated by the amount of the fee. The fee is included in the rent and the rent is determined by the market conditions. I suppose if no commercial real estate brokers existed then the rents would theoretically be cheaper but owners build fees into their rents as a cost of doing business.
• Generally, one half of the fee is paid at the lease signing and the other half is paid once the tenant moves in and starts paying rent.
• The fees are computed based upon the tem of the lease, the rent paid over the term, and the percentage that the owner has agreed to pay. As an example, 20,000 square foot building x $.60 per square foot in rent per month x 60 months =  $720,000 x 6% = $43,200.
• The percentage of the lease consideration - total rent paid over the term of the lease - that the owner pays in fees varies by the product type - office, industrial, retail - and the market conditions that exist - tenant's or owner's market. In other words, if there are more buildings in the market than tenants to fill them, the owner may offer bonus fees to attract a tenant. We have seen this occur in the office space leasing realm in Southern California, recently.
• Generally, the owner’s representative takes half of the fee and the tenant’s representative takes the other half.

Ok, that is it. Simple, right! The hard part is finding a tenant. Oh, well, leave that up to the professionals - your commercial real estate broker.

Five Things to EXPECT from your Commercial Real Estate Tour Guide

Your business is expanding like a prairie fire. Relocation to a larger building is in your immediate future.

You have carefully scoured the on line world and realized that commercial properties are not as readily searchable as their residential counterparts.

Viewing a survey of commercial real estate, that meets your specific needs, requires another approach - reliance upon a commercial real estate professional - a tour guide.

Just what should expect of this commercial real estate tour guide.

In my experience, these five things:

He should meet with you, tour your location, and get an understanding of your needs. Beware of a tour guide that skips this step. Would a doctor prescribe surgery without an examination? Of course not! Viewing buildings without first meeting with you and understanding your move motivation is not life threatening but can waste an awful lot of time. Additionally, in Southern California, vacant buildings are rare. There might not be many for you to look at. Your best option might be to remain in your present building. A commercial real estate professional can counsel you on this.

A list of buildings, meeting your needs, should be provided soon after your meeting. Generally, this list will be tailored around your specific needs and will be a list of ALL available buildings - not simply buildings listed by your tour guide.

A request for you to pare the list to 6-10 buildings that you wish to see. You can best pare the list based upon the criteria, location, size range, exterior appearance, etc. There are so many variables in commercial real estate locations - amount of office space, warehouse clear height, loading doors, electrical service, outside storage, etc. Don't be discouraged if the PERFECT building isn't on the list.

A tour date will be scheduled. Now your tour guide must go to work and figure out which of the 6-10 are actually available and which ones have been leased or sold. This is the time when your tour guide will de-brief with his owner rep counterpart and determine if the availability is a match for you. The first time your tour guide sees the building should not be with you. In other words, he should preview the building and make sure all is as represented and that there are no lingering questions to answer such as - what is all of that inventory in the warehouse? or, the lockbox is not where it is supposed to be. The information should be bound into a tour book for you with brochures and a map.

The tour is conducted. From the list of 6-10, generally 3-6 will be viewed - because some will no longer be available, others are occupied and not vacant until after you need to move, still others may have the wrong deal structure. You should employ a rating system for all of the buildings that you tour and take careful notes on the plusses and minuses of each one. If you look at more than six buildings, you lose track of what you have seen and the tour becomes a blur. Frequently, the tour will raise some follow up questions. Your tour guide should busy himself and get your questions answered quickly so that you can make a decision.

INSIST upon THIS when MARKETING your Commercial Real Estate

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The commercial building that you own has sprung a leak - AKA the faithful occupant has decided to vacate and leave you with an empty building.

Frankly, this is not occurring much these days as ninety eight of every one hundred industrial buildings are occupied in Southern California.

However, certain circumstances cause a vacancy - the business outgrows the building, is acquired, goes broke, or realizes that the building is now too big for their operation.

If you are fortunate enough to receive some notice from the occupant that a vacancy is imminent, good for you! Now, let's use that time wisely in securing a tenant or buyer for your fallow commercial real estate.

Generally, you will engage a commercial real estate professional to market your vacancy. His services will include preparing professional collateral such as brochures website, and postcards. He will install an available sign. Your vacancy will be published in all of the multiple listing services. She will broadcast the availability through conventional means such as newspaper ads, mailers, cold calling, and broker open houses. If your commercial broker is really creative, a virtual video tour of the property will be produced and social media marketed.

Great! Now you just sit back and wait for your broker to call you with a multitude of offers, right? Very rarely, unfortunately. The one thing that will quell an active, well priced, highly sought after size ranged building is the showing protocol. In other words, how will active occupants and their commercial real estate representatives tour your property?

If the property is vacant, you have a couple of options. Option one is that your broker can install a lockbox on your building and allow a free flow of tours. Option two is that your broker is required to be present at all showings. 

But, what if the building is occupied during the marketing process? You also have a couple of ways to accommodate interested parties. You can require your broker to guide the tours or you can allow interested parties to walk through un-escorted.

So vacant or occupied, should you require your broker to be present during showings? I could wax forever on the pros and cons of each approach but I believe you should insist that your broker guide the tours of the property for these three reasons.

Limit the occupant disruption. If your building will be occupied during the marketing, a great deal of  occupant disruption can be avoided by requiring that the tours be guided. Remember, the occupant has paid you rent for a period of time. Parading folks through the space un-bridled without proper notice and consideration is worth avoiding.

Control the flow of information. If the tours are guided, the tour guide (your commercial real estate broker) can insure that all parties have a proper brochure, understand your motivation - whether you want to lease or sell the building, and can make sure that all of the potential occupant's questions are answered and that a course of follow up is established.

Qualifying. If your representative is present during the tours, she gets a first hand feel for the occupant's interest, use, financial capability, competition, and a general "gut feel" for the viability of your space.

Additionally, there is no way to control the access of a lock-boxed vacant building. Your broker may provide the code to a fellow broker, assuming that the fellow broker will guide his client through. In reality, the fellow broker might simply give his client the lockbox code and you have lost control of the access.

Relocating a HOME BASED Business to Commercial Real Estate

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Many, many wonderful companies were started with two things - a great idea and a corner in someone's basement, garage, or living room. Disney, Microsoft, Apple, Hewlett Packard, and others, brain children of their founders, today employ thousands of people. None of these companies existed prior to the middle of the last century and ALL are truly a product of American ingenuity.

You may be reading this post in your home office while taking a break from working in your home based business. Your business now consumes your living room for its information technology department, dining room for sales and accounting, upstairs bedroom for procurement, and the garage for warehouse storage, shipping and receiving. Next door neighbors believe that FedEx is next of kin because their truck is in front of your house daily. You are wondering if moving from home is a wise decision.

The tipping point, for most small businesses that move out of their house, occurs around one of two circumstances - they hire employees or they receive customers. Both are clunky to accomplish from home. I have counseled countless small businesses faced with these situations.  I am consistent in advising them to remain at home as long as you can. Avoid the overhead. Get to the point of practically tripping over yourself, your family and pets before launching into an office suite or industrial building. If you have no employees and don't receive customers, this move can be postponed indefinitely. If you MUST move, this post provides advice on issues to consider as you move your business out of the house and into a commercial real estate location.

Cost considerations. Your business occupies your bedroom. If you own your house with no mortgage, you have little overhead for the business. Once you leave home, you will pay a commercial landlord rent for the location. In addition to rent, your commercial real estate location will require utilities (electrical, phone, internet, gas, water, trash, janitorial, etc.). You pay these costs at home already. Now, you will duplicate your utility costs. Your commercial landlord will require liability and contents insurance and to be named as the additional insured.  This insurance requirement exceeds what your business needs at home. Most commercial landlords will require a lease term of one year or more - thus your business is committed for this amount of rent. Depending upon the age and financial capabilities of your business, you may be asked to personally guarantee the lease obligation.

Permitting. The municipality where the business locates, will require occupancy permits. Chances are you have a business license as a home based business but now you will need a permit to operate your business from a commercial location. If the operation involves a manufacturing process, plan on this taking some time to accomplish.

Location considerations. Folks believe that the three rules in real estate are location, location, location. I would add a fourth - where does the boss live - that is you! If you move your business to an off site location, working until 2 AM is not as easy as staying up past your bedtime at home. You cannot roll out of bed, in your pajamas, and go to work in the spare bedroom anymore. You must rise, dress, drive, and potentially greet employees. Find a location as close to home as possible. You will save on the commute time.

To lease or purchase. I generally would advise that you lease and do so for as short a period as possible. You don't want to commit yourself to a location that you outgrow in three months or discover that moving was a huge mistake and you should retrench to the garage. Buying a location makes a great deal of sense at some point in a businesses tenure, but not first thing. Lease a spot, get the business stable, make some money, hire some employees, make some more money, and look to buy down the road. I discussed this in detail in this post.

JOB CREATION through Commercial Real Estate Transactions...DON'T Squelch them!

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Are Commercial real estate deals a job creator? Conversely, if commercial real estate transactions are NOT occurring, does that mean that jobs are lost? To add one additional layer to this discussion - if  the governing agencies adopt policies that limit commercial real estate transactions, are jobs lost as a result? Well let's dive in, shall we?

Commercial real estate transactions. Deals come in three flavors, a purchase, a new lease or a renewal of an existing lease. In a purchase or a new lease, there are two sides of the transaction - the owner and the occupant. Generally, these two sides engage representation in the form of a commercial real estate professional(s). Our services are employed by an owner to find occupants for empty buildings or to assist occupants in their search for a building. When we are successful in bringing an owner and an occupant together and a lease or purchase closes, we are paid a fee for our services - simple, right? So where is the job creation in that circumstance? Easy, the more deals that are occurring, the more professionals that are needed. But how about other job creation? Let's examine the stages of the deals and the potential jobs that result.

Pre-transaction. Quite possibly, prior to searching the market for a new business home, an occupant consults with his CPA to gain some insight into the tax advantages of a move, the viability of taking on additional expenses, and the justification of leasing vs. owning a location. Preparation of tax returns and financial statements for lender or owner approval may also be an element of the pre-transaction - job one. Consultation with the occupant's business bank typically occurs - job two. Some sense of the legality of owning or leasing a building and the best entity from which to own or lease commercial real estate is done with legal counsel - job three. Depending upon the complexity of the occupant's operation, an occupant may consult with a project manager that can shepherd the occupant through the moving process - job four. Certainly, an owner or an occupant gets a feel for the market, lists the building for lease or sale through a commercial real estate professional and/or teams with a broker to search for a building - jobs five and six...not counting support staffs that make deals happen!

Transaction execution. Escrow officer - job seven. Title representative - job eight. Natural Hazard Disclosure consultant - job nine. Building inspector - job 10. Project manager - job 11. Governmental agency consultant - job 12. Fire consultant - job 13. Environmental consultant - job 14. In the case of a purchase, a lender - job 15. An appraiser - job 16. The attorney, CPA, and business banker also may play a role in the execution of a commercial real estate deal but their jobs were counted in pre-transaction.

Post transaction. An architect - job 17. Contractors for office construction or remodel, flooring, painting, electrical, heating and air, plumbing - jobs 18-24. Office furniture purchase and installation - job 25. Internet cabling and phone system - job 26. Material handling equipment, forklifts, warehouse racking, conveyor systems - job 27. Security systems - job 28. Maintenance folks for the new location, landscape, heating and air, roof, parking lot, fire sprinkler systems, janitorial - jobs 29-35. A moving and storage company - job 36.

So, as I have illustrated, commercial real estate transactions create jobs - LOT'S of jobs! So, absolutely, if the governing agencies limit, through regulation, the propensity of commercial real estate deals - movement - then jobs are lost.

Five BIGGEST Challenges to a Commercial Real Estate Deal

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As I have commenced my 32nd year in the commercial real estate brokerage business, I have a great perspective on the challenges that confront owners and occupants of commercial real estate. I have categorized these challenges into the following five. In no particular order, here you go.

Governmental regulation. I have to laugh at the absurdity. If I didn't laugh, I would cry. Some beauties. A use that is allowed in a building by zoning right, yet a city demands a conditional use permit - an extra layer of permitting that requires a minimum of 120 days and over $5000 to process - just because. A manufacturing company - that will employ fifty people - required to secure a parking variance - even though the building has far more parking spaces than the fifty employees will consume. A trade school that will teach our youth to weld and repair air conditioning equipment that spent OVER A YEAR getting the proper permissions from the city. The absurdity has progressed to the point that I recommend that each of my occupant clients engage a person who can speak "government ease" when dealing with a governmental agency.

Shortage of available buildings. Frankly, this is as bad a market as I've EVER seen for occupants. There are simply not enough available buildings to fill the demand of growing companies. What exacerbates the problem is that the supply of new construction is non existent. Currently, 97.5 of every 100 buildings in Orange County, California is occupied. As I have written about extensively, what is left is a misfit toy - there is something functionally or financially wrong with the building or the building is occupied and the occupant cannot vacate because - yep - he has no place to move.

Unrealistic owners. The shortage of available buildings has caused owners of commercial real estate to puff our their chest and declare that their property is now worth so much more than the market can bear - why not, nothing else is available!

Unrealistic occupants. A great number of leases are expiring this year and next. These leases were transacted in the 2010-2012 era when we were entrenched in an occupant market. When these occupants must now renew a lease or seek a new home in an owner's market - there is a severe shock at how quickly things turned in the owner's favor.

Miscellaneous. Bank underwriting, environmental issues, office space that is not approved, Americans with Disabilities Act requirements, Energy bench-marking, high pile storage permits, seismic retrofitting...I have to stop before I throw up.

Is YOUR Commercial Real Estate Broker Cooperative?

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Many would agree that a customer's experience is paramount to a successful business. Southern California is filled with many, many places to shop, dine, and be entertained. If your business is not customer centric, the customer will quickly shop, dine and seek entertainment elsewhere.

Additionally, a customer can now research, shop, and read reviews on line. If a disgruntled customer Yelped you negatively - lights out! Your business won't get a first look - much less any repeat business.

As I considered the importance of the customer experience, and the ways in which folks research and shop these days, I wondered about a parallel with commercial real estate.

Commercial real estate availabilities - vacant buildings - are the merchandise. Potential occupants of commercial real estate - buyers and tenants - are the customers. Commercial real estate brokers are in effect the shop keepers - we represent owners of available commercial real estate. However, we also represent commercial real estate customers - the buyers or tenants.

Generally, the lease or purchase of commercial real estate is negotiated by these commercial real estate shop keepers. Because you place the marketing and shopping tasks in the hands of your commercial real estate broker, your broker's willingness to cooperate with other commercial real estate brokers is critical!

Is your commercial real estate broker cooperative? I believe you should understand the items below to know for sure.

Fee sharing. Generally, commercial real estate commissions - fees - are split between the owner's representative and the occupant's representative. In rare occasions, an owner's representative is unwilling to share a fee. As an owner, you just eliminated any cooperation with a broker who may represent the perfect buyer or tenant for your property. You should fully understand how your representative treats fee sharing with occupant brokers.

Information sharing. Your commercial real estate representative should share information on your available building with all of the available multiple listing services - including the ones that charge for entry - such as LoopNet.

Property tours. Is your representative present when your building is shown by another broker to a potential tenant or buyer? Being present at tours is a huge time commitment but one that your broker should be willing to make. After all, would you allow a customer to walk through your store without asking them if you could help them?

Responsiveness. Your representative should respond to all property inquiries the same day that they are received. Can you imagine visiting a store on Black Friday that was closed? If your commercial real estate broker is not responsive, your store is closed!

Accuracy of information. Sharing information is tantamount to a successful marketing campaign but your representative should insure the accuracy of the information as well. Searches for commercial real estate are conducted with several criteria - percentage of office space, warehouse clearance, size, location, electrical service, etc. If the information on your building is in accurately represented, your building may not appear in a search - and your building will not be considered by a tenant or buyer.

Ethics and integrity. The reputation of your commercial real estate broker can really attract potential occupants to your commercial real estate. If there is a belief that your representative is accurately communicating motivation and urgency, and will deal with all requirements fairly and openly, there is a greater chance that your commercial real estate will be leased or sold quickly.

Residential vs Commercial Real Estate Agents...5 Differences



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Unless you own a business that has leased or sold commercial real estate, you have purchased or leased commercial real estate for your own account, or you work for a company that has leased or purchased commercial real estate, chances are you have never dealt with a commercial real estate broker.

Most of us have dealt with a residential real estate agent - especially if we have bought or sold a house. The two professions are similar but dramatically different - all at the same time!

This post was written to highlight the differences between residential and commercial real estate agents.

Agents, brokers, and Realtors. Many times these titles are used interchangeably but each has its own meaning. Generally, all real estate practitioners - commercial or residential - are agents. All with the agent designation have passed the California agent's exam and currently hold a license through the California Bureau of Real Estate. California law requires an agent to operate beneath a broker. A broker has passed the California broker's exam and may or may not have agents beneath her. I, as an example, am a broker but have no agents reporting to me. A realtor is a broker or agent that is a member of the National Association of Realtors. Typically, commercial agents are referred to as brokers - regardless of their licensing - and residential agents are referred to as Realtors. In some cases, commercial agents or brokers are members of the National Association of Realtors, but commercial agents are not commonly referred to as Realtors.

Leasing and selling. Commercial real estate brokers can make their living leasing or selling commercial real estate. Most in the biz complete several lease and sale deals every year. Residential Realtors generally don't lease houses - they sell them.

Disclosures. Believe it or not - many, many more disclosures are required in a residential transaction than in a commercial real estate transaction. I believe the reason may be the sophistication or lack of sophistication of the buyer in a home purchase vs. a commercial lease or purchase.

Licensing. Anyone with a California real estate agent's license may transact commercial or residential deals. In other words, no special license - other than an agent's license - is required to sell commercial real estate.

Specialties. Commercial real estate specialties abound - industrial, office, retail, land, income properties, multi family. Additional specialization occurs in the area of owner or occupant representation - in many cases, commercial real estate brokers ONLY represent occupants - not owners. Finally, specialization can occur for specific industries - such as companies that operate distribution warehouses in the Southwestern United States. Conversely, Realtors sell houses. Realtor's specialization occurs in specific neighborhood expertise, luxury homes, or buyer or seller representation.

Should You AUCTION your Commercial Real Estate?

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Recently, I was approached by a former Lee & Associates broker who now hangs his hat with Auction.com.

When the auction platform first emerged in the early 2000's, most of the commercial real estate auction volume was from banks that had foreclosed on properties and wanted to quickly liquidate the assets in bulk. As the flood of foreclosed properties has become a trickle, auctioneers, such as Auction.com have shifted their sights to sellers who have equity and want to sell vs. having to sell.

My former colleague wanted to assess my interest in the platform. I have now referred two potential transactions to him and have become conversant with the concept. What follows is a review of the mechanics of auctioning your commercial real estate.

Factors determining success. Your success in auctioning your commercial real estate will depend upon the type of commercial real estate you are auctioning and your pricing expectations. If you own a vacant parcel of land in Barstow, chances are slim that the auction process will generate enough buyer interest. Conversely, if you own a partially leased office building in Costa Mesa, the auction platform will focus buyer interest upon your building and in many cases generate a higher price than otherwise would be achieved by conventional marketing means. The auction platform allows you to set a reserve price - a minimum price at which you are willing to sell.

The process. The auction company will assess the market value of the commercial real estate based upon a quick review of comparable sales and comparable availabilities. A value range will be given to the potential seller. If this range meets with the seller's pricing expectations, a reserve will be determined, and the auction company will be engaged to conduct the auction. The auction company fronts the cost of an environmental report and a property condition assessment. Auctions are conducted every two weeks on Wednesdays. The marketing process is 58 days, the auction two days, and the close 30 days thereafter. The entire process, soup to nuts, takes 90 days. The seller pays nothing to the auction company. The auction company seeks its compensation from the buyer - generally 5% of the sale price. Interested parties are directed to a document vault where all of the due diligence is housed - environmental reports, property condition assessment, leases, preliminary title report, etc. Interested parties are required to sign a confidentiality agreement. Interested parties that become bidders are required to post a bidding deposit - generally $10,000 that is applicable to the purchase price if they are the winning bidder. Bidders agree to execute a purchase and sale agreement the day they become the winning bidder and to close in thirty days. At the point the winning bidder signs a purchase and sale agreement, the winning bidder has money at risk and cannot walk away without penalty.

My take, positives. The auction process focuses buyer interest very quickly. Engaging a good auction company will expose your commercial real estate globally - to as many buyers possible. Normally, marketing occurs, a buyer or two is procured, an escrow is created and you wait with crossed fingers while the buyer figures out if he can buy the building or if he wants to buy the building. Auctioning your commercial real estate removes the if and only delivers qualified buyers that can and must perform if they win the bid. In effect the old model of selling commercial real estate is reversed - all of the investigation occurs before an escrow for the purchase is created. The buyer is committed.

My take, negatives. Auctioning is expensive. The buyer pays a 5% fee to the auction company and the seller normally engages representation for showings, tours, and market expertise - and pays another 3-4%. Currently, there is limited allowance for a buyer to secure financing. A seller can sell the property out of auction, but if he does, the buyer fee of 5% is paid by the seller - a fairly harsh cancellation penalty.

Conclusion. Auctioning is something to consider if you are selling a partially or fully leased commercial building. Your commercial real estate will be exposed to the broadest market. If your goal is to sell your commercial real estate to an owner occupant, auctioning is not the best avenue - currently. But, stay tuned. The process will evolve and is worthy of a look in the future.

How to Choose a Commercial Real Estate Broker?

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Your commercial real estate will soon be vacant and you have decided that your best shot at getting your building leased or sold quickly is to list the building with a commercial real estate broker. So, what factors should you consider when making your choice?

Global, national, regional, or local firm. The nature of your commercial real estate will largely determine your need for a global, national, regional,  or local firm. Specifically, if the marketing of your CRE can benefit from exposure in Sri Lanka or Abu Dhabi, a global firm can provide this. Conversely, if your building will appeal to the neighbor, a local firm could be a great choice. A nice compromise would be to choose a national or a regional firm. I have the benefit of working with a national firm. We have 54 offices around the US. However, our knowledge of the local commercial real estate landscape is as good as any local firm - because we started as a local firm and have grown our platform from that basis - strong local knowledge.

Background, tenure, experience. Length of time in the business is not the only factor to consider but it certainly is a key component of choosing the right representative. Certain firms encourage their agents to form teams of several practitioners. Other firms are a collection of sole operators. Generally, the teams are comprised of a senior "rain maker" and one of more junior associates. Two key considerations of hiring a team vs. a sole operator - make sure you know who will be the single point of contact within the team. Often, a firm that interviews with a team will have an impressive array of seasoned brokers. You may be drawn to a specific member of the team. But what if that member pawns you off on a junior associate? If you are considering hiring an sole operator within a firm to market your commercial real estate, make sure the individual has sufficient support to handle property inquiries, marketing, and showings.

Knowledge of your market. Does the team or individual that you are considering hiring understand your specific market. You don't want to engage a firm that specializes in multi family investments if your commercial real estate is a single tenant industrial building. Additionally, if your building is a 50,000 square foot office building in Orange County, California, how conversant are they on activity within that specific submarket? Can they talk about deals that have transacted, competitive spaces that are available, and potential occupants that are looking? If the answer to these questions is yes, chances are you are considering the correct representatives.

Complimentary vs. competitive listings. There is great benefit to you that your representative has control of other complimentary available buildings in the market. Complimentary listings are those larger or smaller than yours. Listings typically have signs (both physically and digitally) advertising their availability. These signs will generate inquiries from potential occupants. It is important that your representative be well represented in the market so that these inquiries will pour in. I would caution against hiring a broker with many competitive listings to yours, however. If an agent is marketing four buildings of similar size, amenities, and price - to whom does his loyalty lie?

Does she play nicely with others. Last on the list, but first in my opinion. Your commercial real estate representative is tasked with marketing a large portion of your net worth - a piece of you! Whomever you choose should wake up everyday determined to find an occupant for your building. Remember, they are your gatekeeper to the commercial real estate market - the occupants that inquire, the active brokers who represent suitable occupants, and occupants that operate in a similar industry or that are located close buy. If you can't imagine the person representing your interests - don't hire them! Ask for the names of their three biggest competitors and call them. See what their competition has to say. This can speak volumes about the person you are hiring.

 

What Tenant Improvements Will an Owner of Commercial Real Estate Consider

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Recently, I have encountered two occasions of owner funded tenant improvements in an existing industrial building - or I should say a request for owner funded tenant improvements. I believe the topic is post worthy as the question arises quite frequently.

Definition: According to the Certified Commercial Investment Membership Institute "CCIM", the real estate definition of leasehold improvements, also known as tenant improvements (TI), is "the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant."

I am limiting the discussion in this post to an industrial space that has been previously occupied vs. an office space that is in shell (no walls, ceilings, or flooring) condition.

An owner's decision to fund tenant improvements depends upon the following three factors:

Cost: An owner will generally compute the total consideration of the lease by multiplying the monthly rent (including contractual increases throughout the term) by the term of the lease. This amount is the gross amount of revenue that the owner will receive from the tenant over the term of the lease. Based upon this figure, an owner may be willing to invest a small percentage of the future income to secure a tenant. Items such as painting and carpeting the office areas and possibly painting the warehouse walls are considered necessary refurbishment to make the space lease ready. Tenant improvements generally refer to something over and above normal turnover refurbishment. So, as an example, if a tenant requested that new lighting be installed in the warehouse at a cost of $10,000 and the total consideration of the lease was $1,000,000, chances are great (assuming the factors below are also in line) that the owner would fund this request. However, if the tenant requested that the power service be ungraded at a cost of $100,000 and the lease consideration was $750,000, an arm wrestling match would ensue.

Available Resources: AKA, the amount of cash that an owner has on hand to fund tenant improvements. Generally, an owner will build up a tenant improvement "slush fund" from the rents received to handle future refurbishment costs (paint, carpet, etc.). Most commercial real estate lenders will require a reserve for tenant improvements so that the owner won't spend all of the rents and jeopardize his ability to rent the space if the tenant vacates. If an owner is cash poor and a tenant requests a tenant improvement, an owner may ask the tenant to pay for the improvement and offset the cost of the improvement by an amount of free rent.

Nature of the Improvements: With the definition above, the word "customized" jumped out at me. Customized connotes some special purpose improvement that will not find appeal with the next tenant in the space. This is one of the criteria from which an owner bases his decision to pay for an improvement. The last thing an owner wants to do is to pay for an improvement that must be removed in order to lease the space the next go around. Generally, additional office space falls into this category. Most industrial tenants don't require a great percentage of office space compared to warehouse space. Therefore, if a building is "over improved" with too much office space, the building could be un-marketable. The opposite would be true of an improvement in the truck loading. If a tenant requested that truck hi loading be installed, the value would be universal and the improvement investment a wise one.

DON'T Overprice a Commercial Real Estate Listing...Here is WHY

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If I had a dollar for every time an owner of commercial real estate proclaimed, "We can always lower the price - but we certainly cannot raise the price", - well, you know the rest.

OK, fair enough, I get it. I might take the same approach when selling my own real estate. The purpose of this post, however, is to dispel the two myths mentioned above - that you can always lower the price but you cannot raise the price.

The background: Recently, I posted about how price is determined in a commercial real estate deal. If you missed the post, shame on you, but you can quickly get caught up by reading here.

Your commercial real estate is only worth the price that a ready, willing, and able buyer with proper motivation is willing to pay you and that you are willing to accept - period. Let's break that down. Ready, willing, and able - a buyer or tenant that is in the market today or in the near future, that can use the building amenities that are being offered and that has the financial capabilities to lease or buy your commercial real estate, check! Proper motivation - a reasonable period of time with which to search for a location, a building that is readily available, no extenuating circumstances that would limit the number of building availabilities that can be considered, check! That you are willing to accept - aha, this is where the whole idea of overpricing takes root - your motivation, check!

A high asking price: A common misconception arises when an asking price is too high for the market. An owner believes that the ready willing, and able buyers or tenants will simply offer on an overpriced listing. The reality is that the ready, willing, and able buyers and tenants perceive that the expectations are too far apart and will not offer for fear of offending the owner or simply that offering on an overpriced listing is a waste of time - there is no chance that the two parties could agree to a reasonable price.

A low asking price: A low asking price for commercial real estate communicates motivation and a realistic idea of what the market will bear. Many times a low asking price will generate so much activity that the price is actually "bid up" over the original ask. If you have ever been on the owner's side of a bidding war, it is quite appealing - for a buyer or tenant, not so much!

Lowering a high asking price: If you have ignored the pleas of your commercial real estate advisor and have over priced your commercial real estate, chances are you have not received many, if any offers. Now you endeavor to lower the asking price. This move creates all manner of activity within the brokerage community - the owner is getting more realistic - or worse, is desperate! Akin to that pair of shoes at your favorite retailer - if you just wait long enough, the price will come down again.

The moral: Be realistic about what features your building contains compared to your competition. Make sure you understand three metrics - recent comps, current avails, up or down trending pricing. Keenly assess your staying power - how long can you afford to feed a vacant building? Price accordingly, rinse and repeat!

Commercial Real Estate Cube Space? So What?

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The Preview: As I previewed several buildings for a client tourrecently, I encountered an occupied building that was on the market for lease. This is common. When an owner is notified by his occupant that the occupant will vacate at the end of his lease, the owner's recourse is to market the space - during the remaining time of the lease - while the building is still occupied. 

The Debrief: As the occupant showed me around, we discussed the occupant's moving plans - timing, new space needs, reason for the move, etc. I will generally do this - that is, debrief with the occupant - as I need to know if the space WILL in fact be available OR if the owner and occupant are playing cat and mouse in an effort to effect a lease renewal. 

Does he need to move: What struck me as odd was the way in which the occupant utilized the space. Let me set the stage for you. 35,000 square feet of warehouse space with an interior clearance of 32 feet and fire sprinklers within the warehouse that would allow the occupant to stack his product to the rafters - but this guy was not using racks and was stacking his product on the floor of the warehouse on pallets. The floor space was consumed. But, what about ALL of the space between the top of his floor stacks and the ceiling - the "cube space" - LOST! 

It's a BIG Deal: Now, here is why this was a big deal. Presumably, this occupant had lived there for three to five of the preceding years. He had paid rent for the square footage of the building - remember the 35,000 square feet - for ALL that time. Because he didn't stack his product to the ceiling, he was, in effect, paying for much more space than he needed. When I asked him why he didn't store his products in racks - thus utilizing the cube space - his answer was, "he didn't want to go through the permitting expense of installing racks". Hmmm, so he would prefer to pay for three times more space than he needed? Certainly made no sense to me! I calculated what leasing the excess space cost him on an annual basis - it was on the order of $100,000! That will buy lots of racking and permits. Heck, he might be able to buy a new forklift as well. 

The Moral: So here is the moral. If you believe you are out of space, look up. With a bit of material handling creativity, you can find space you never knew existed - in the cube!

 

The PERFECT Commercial Real Estate Investment

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I have my younger brother, John to thank for this post's inspiration.

You see, my brother has a computer repair, maintenance, and installation company in Texarkana, Arkansas. The business started as a hobby with a bit of supplemental income but has now become a terrific revenue generator and space hog. John's garage, living and dining room can no longer sufficiently house his burgeoning business so it is time to look for a location.

Enter older brother. Although I won't assist John in his site selection in Arkansas...the commute would kill me...even by SoCal standards, I was able to provide some helpful counsel on the PERFECT commercial real estate investment.

John is considering a commercial real estate investment that he will partially occupy and rent out the balance for income.

So just what should a new investor in commercial real estate consider when analyzing a deal. In my opinion, these six factors should be considered.

The income stream: The tenant(s), the rent that is collected...not contracted, the relationship of the rent to market rents...higher or lower, the tenant(s) business, the vacancy in the market, the credit worthiness of the tenancy, the length of the remaining leases, the expenses...property taxes, insurance, maintenance, tenant improvement costs...ALL form the income model of a commercial real estate investment. In my opinion, the income stream is the MOST important consideration in a commercial real estate purchase. The reason is simple, if there is no income, there is no investment! Sure, he can buy an empty building and lease it, but that is a whole different kettle of fish. Be prepared to invest a significant amount of your future rental income originating a new lease. You can read more about that here.

Purchase price: I recommended that John have a complete understanding of the price and how the price related to market comparable sales. You definitely want to purchase commercial real estate below the latest round of comps...even if the market is increasing. The price you pay determines your property tax assessment forever and your ability to fill a vacancy in the future also depends upon your basis...the price that you pay. Always try to buy below replacement cost if possible.

Capitalization (Cap) Rate: I walked John through a simple computation of the cap rate for a commercial real estate investment. Take the gross income (the rent that the tenant(s) pays) and subtract the expenses. This yields a net operating income. Divide the net operating income by the purchase price and voila, you have the cap rate. Notice that I mentioned cap rate third on the list. This is not by accident, as I believe too many commercial real estate investors place too much emphasis on this metric...see Income Stream. What can appear as a great return (cap rate) will evaporate if the tenant cannot pay the rent. The opposite would be true of a dramatically under market rent. The return (cap rate) would look measly. But, if you can move those rents to market, a great investment may bloom.

Financing: I advised John to pay cash vs. leverage the purchase with new financing. Many would disagree with me, but he's my kid brother and I want him to send me a Christmas gift. If he does decide to get a loan...the term, interest rate, recourse or non recourse nature of the loan, amortization, and pre-payment penalty should ALL be vetted.

Exit: Is the plan to pass the property to his heirs (hold it forever) or lease the vacancy and sell the building? I told John to always have an escape route in case the investment should not unfold the way you planned it. As an example this escape hatch could be selling the building to the occupant.

Those things you don't think about: Reserves for vacancy and improvement costs, structure of the purchase...due diligence and closing, lease documents, condition of the property, environmental issues, zoning and use restrictions, pool of potential occupants, etc. You just never know when one of these snakes will bite you...so be prepared.

So good luck in your foray into commercial real estate, baby bro! And remember us little people that helped you along the way...

How is Price Determined in a Commercial Real Estate Deal?

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Price. That monetary value that an owner of commercial real estate places upon his building. Just how is the pricing in a deal determined? That question is the topic of today's post.

Simply explained, the price or lease rate is a function of what a ready, willing, and able buyer or tenant will pay and what an owner is willing to accept.

But, we must begin with an asking price, in order to attract a ready, willing and able buyer or tenant, correct? So, how is an asking price determined?

From my experience, dating back to three pieced suits and wide lapels, asking prices are derived from several factors:

Location. A well located, freeway proximate building will command a higher asking price than one that is buried in a business park in a residential development. The ready pool of potential occupants will also factor in to pricing as the building may provide an easy expansion for a neighboring business. Ready sources of raw materials for manufacturing companies or easy logistics for warehousing companies can enhance a building's location - and thus an asking price.

Amenities. If your building has the bells and whistles that occupants demand, the building is more valuable and will sell or lease for a higher price. As an example, a freestanding building on its own lot is more desirable than a building that shares a wall with the building next door. An outdoor storage area is a feature widely desired by occupants because they can use the exterior for more space. More amenities - higher asking price.

Owner Motivation. This is probably the BIGGEST determinant of an asking price. An owner must have realistic expectations of the price his building will command in the market OR have enough staying power for the market pricing to "catch up" to his asking price.

Recent Comparables. Too often, folks in my profession, tend to generalize the recent market sales or leases without truly understanding the motivation behind the transaction. Such as, did the occupant renew his lease or consider market alternatives and choose this particular building? Was the occupant motivated by any special circumstances - such as being next door? The "true story" of the transaction should be considered in any asking price decision.

Current Availabilities. As closely as possible, the number similarly equipped buildings that are currently available in the market should be analyzed and understood.

Up or Down Trends. If the market is up trending, you can push pricing a bit. The opposite would be true of a down trending market. An owner might benefit from preempting a down trending pricing market by leapfrogging. Leapfrogging is a method of taking the lowest recent sale or lease deal and asking even less. Sometimes occupants react because they believe the building is a bargain.

Current Borrowing Rates. If capital is plentiful, easy, and cheap, an increase in pricing generally will result - and an owner can ask more - for his building. The reason is the buyer pool will be more plentiful, competition will be more apparent, and available inventory will leave the market more rapidly - thus upward pressure on pricing.

Once an asking sale price or lease rate is determined, the market takes over- that illusive force that pits buyers, sellers, tenants, and landlords into the wrestling match of a commercial real estate transaction. Ask too much for a building with few amenities - the building will sit. Bring a properly priced, well appointed building to the market - the floodgates of potential occupants will rain on your door.

TIME Kills ALL Commercial Real Estate Deals!

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One of the first hard lessons I learned when I entered the CRE fray in 1984 was that TIME is not a friend to a commercial real estate transaction.

As time lapses - motivations of buyers and sellers morph, market conditions vary, pricing fluctuates, business ebbs and flows, and all manner of havoc occurs that can queer a business deal.

A reminder of this lesson surfaced last week.

I received a call from a client.

In summary, my client's business model had changed and he required fifty percent more space - immediately! Normally a great situation - but - he leases his existing location and thirty three months remain on his lease obligation - so a relocation to a larger building was out of the question. We needed to lease something VERY close by to accommodate the shift in my client's business.

Good news! A building was available next door and had been for nine months - which is rare in Southern California these days - as seven of every ten industrial buildings are occupied. The two reasons the building had lain fallow for 3/4 of a year were the lack of a truck loading dock and the owner's reluctance to paint and carpet the office space.

So, the building next door to my client's mother-ship was a bit of a misfit toy. Most occupants, considering a building over 20,000 square feet (which this was), require some form of dock access - again this building had no dock access - which meant product delivered in large tractor trailer rigs had difficulty un-loading their wares - thus making the building un-desirable for most industrial occupants. My guy didn't care about the loading - he only wanted the space - and the fact that his mother-ship was next door made the vacant building ideal. I was confident we were in a great position - until...

We excitedly inquired as to the vacant building's availability. Even though a building may appear as available in a multiple listing service - you still have to verify. In this case, we were told the building owners had agreed to terms with a tenant and were negotiating a lease - BUMMER! What are the odds? A building sits for the better part of a year and right when my guy needs it, it's leased? Come on!

I am happy to say the cloud has a silver lining and my client is now the vacant building's tenant.

What happened? Time. Time killed the competing tenant's deal.

Here is how. The competing tenant believed that the owner had no other interested parties. After all, no one had stepped forward to lease the building since last Halloween - why would anyone appear now? Therefore, the competing tenant and the competing tenant's advisors became a bit over zealous in their requests for concessions - prolonged the process - and provided a window of opportunity for my client. You see, a deal is not DONE until BOTH parties sign the lease agreement. We had to move VERY quickly, ask for no concessions, and lease the space at the asking rate - but, losing the space was potentially more costly to my client than the agreed upon terms.

So the moral to the story? Approach every negotiation as though ten people are nipping at your heels. The truth is, they may be!

When is URGENT, Too Urgent in Commercial Real Estate?

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Two recent situations have formed the genesis of this post.

One instance was a special purpose use that needs to occupy a space by September 1. The use will require special permitting from the city and an extensive amount of construction. Another is a complicated machine shop operation that must vacate their existing location in 120 days, which means we must find them something, negotiate a lease, fixturize the building and move...and we just started to search.

Don't get me wrong, we, in the commercial real estate business love working with motivated owners and occupants who share an urgency to get a deal done. Knowing that a buyer has already sold a property and needs to re-invest those proceeds into another commercial real estate property adds an urgency. An occupant that is quickly approaching an expiring lease urgently needs to make a commercial real estate decision...to move or renew his lease.

But, is there such a thing as too urgent? The short answer is yes!

Depending upon the complexity of the transaction, there is a minimum time necessary to make a deal.

The Requirement: Let's say you want to buy a 20,000 square foot industrial building in Anaheim, California. Optimally, you require a building that contains 3,000 square feet of office, 22 foot warehouse clearance, a fenced outside storage yard, and 400 amps of power...in other words, a pretty "plain vanilla" requirement to purchase. So let's work backwards. Your lease expires in 9 months and you would love to avoid paying double rent. In a perfect world, you would move into your new building the month after your lease expires...so we have 9 months to get to work.

You should plan this amount of time to affect each step of the process:

Search and Tour: 2 weeks to 2 months
Negotiate and Sign Contracts: 2 weeks
Escrow and Title: 2-4 months
Fixturize: 1-3 months
Move: 2 weeks

The quickest you could accomplish the deal would be 4.5 months...plenty of time if your lease expires in nine months...but this assumes everything will go perfectly...which is rare!

The outside dates of your purchase transaction could take you 10 months...which means you are already out of time and will find it difficult to complete your purchase prior to your lease expiration.

Things that can speed the process: leasing vs. buying..the escrow period is avoided. A wide geographic search area...more buildings from which to choose, a single decision maker that lives in the market where the requirement is centered...travel time is avoided, avoiding construction...city permitting is un-necessary, being realistic about market conditions, and having financial data readily available for the landlord's approval.

Things that will slow the process: A use that requires special city permitting such as a conditional use permit, extensive construction in the new location such as new offices, buying vs. leasing, changing the requirement...you start looking for 20,000 square feet and realize you need 30,000 square feet, a decision maker that is out of state or a committee of decision makers, or not having ready access to financial information for bank or landlord approval.

In the case of the occupant example above that needs to be in by September 1, we engaged a consultant that deals with municipalities. The ONLY way we will be operational is if the city is flexible. As to the 120 day requirement...stay tuned!