Friday, January 30, 2015

Ways to FINANCE a Commercial Real Estate Purchase

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I have written extensively recently about the HUGE increase in selling prices for commercial real estate in Orange County, California. Since the beginning of 2013 we have seen sales prices increase by a whopping Fifty Percent! It dawned on me that my readers might want to learn about the various ways to finance commercial real estate...which is the subject of this post.

As a buyer of commercial real estate you fall into one of three owner/occupant (your company will operate out of the building that you purchase), an investor (you don't occupy the building but purchase the building for the tenant's rent), or an owner/investor (you buy the building and partially occupy the building and have the balance as rental income). I will focus today on the financing options of the owner/occupant and the owner/investor.

Small Business Association loans: Also known as SBA loans, real property (not equipment or cash flow loans) loans through the SBA are generally one of two flavors...a 504 or 7A loan. The 504 loan is a fifty percent first loan from a bank and a forty percent second loan from the government (also known as a debenture). The 7A loan is a ninety percent government guaranteed bank loan. Each type of SBA loan (504 and 7A) has its advantages and disadvantages. The advantages include, small down payments (10%), fixed interest rates, ability to finance building improvements, and wide availability from a number of lending sources. The disadvantages are the origination fees, the prepayment penalties, the collateral and personal guarantees, and the cash flow and years in business requirements. If you would like to read about SBA loans in greater detail, you can click here.

Conventional financing: Once upon a time, before the preponderance of SBA financing, if you wanted to buy a building, you showed up at your local bank or savings and loan office and applied. What resulted was a loan of seventy five to eighty percent of the purchase price. Boom. Done. Not much as changed over the years...except of course, the savings and loans are extinct, there are fewer commercial banks, and the banks would prefer for you to originate an SBA loan because the bank's risk is less since the government is guaranteeing a portion of the loan. Hmmm, I guess a lot has changed.

Seller financing: We saw a lot more seller financing when the market interest rates bubbled above four to five percent and a borrower could not seek ninety percent financing through the SBA. There are few advantages for a buyer to seek seller financing, but if a seller of commercial real estate owns the property free and clear and is willing to finance the purchase, the buyer generally avoids the need for an appraisal and may also skirt certain origination fees.

Third party financing: Does your Aunt Barbara or Uncle Frank have a substantial nest egg earning close to zero percent in a certificate of deposit? Maybe they would like to loan you the money to buy a building for your company. They get a great return on their money and have the security of the building as collateral. Plus, you'll have something to talk about at Thanksgiving!

Purchase the building for cash: I've only seen this occur a couple of times in a career that commenced when Reagan was President, but it happens. The cool structure is to buy the building personally (or as an LLC), with personal cash, and lease the building to your company. Your company then pays you rent...Bingo!

Friday, January 23, 2015

9 Reasons your MANUFACTURING BUSINESS should locate in Anaheim, California

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Orange County, California....Ahhh, the beautiful clear blue skies, the beaches, the mountains, the entrepreneurial spirit that abounds in each of us that calls the county home...MAGNIFICENT! The OC is truly a special place and one that I am proud to live and work in every day.

One city, in particular, within the county we call Orange, is VERY special...the city of Anaheim. So, why not start with Anaheim as the first in the series of Reasons your Manufacturing Business should locate in___________, California.

In no particular order, the reasons for locating your manufacturing business in Anaheim, California are enumerated below.

Freeway proximity: Anaheim, California is really two cities...the east and the west. Diagonally dissected by Interstate 5 (the 5), and bordered by the Garden Grove (the 22) to the south, the Riverside Freeway (the 91) to the north, and the Newport and Orange Freeway (the 55 and 57) as its legs, Anaheim boasts a location like no other in the county. Any vehicle that traverses the county must travel through Anaheim. You can get to Los Angeles, the port, the mountains, the desert or the beach in an equal amount of time. For this reason, large and small manufacturing and distribution companies call Anaheim their home.

GREAT labor base: Skilled, clerical, and hourly labor pools abound in the city of Anaheim. Some VERY large employers have located in Anaheim including Kaiser, Disneyland, Extron, L3 Communications to name a few.

Entertainment: Mouse ears, halos, and quacking mascots can be found in Anaheim along with The Grove which has hosted Tiger Jam and Orange County Top Workplace galas. The Honda Center (in addition to being the home of Stanley Cup Champs, the Ducks) books star studded entertainment. The world champion Los Angeles Angels of Anaheim play their home games at Angel Stadium. When not in use as a state of the art baseball venue, the stadium is filled with rodeos, monster truck races, motocross and concerts...and oh yeah, the Happiest Place on Earth is in Anaheim...DISNEYLAND!

World class convention center: The Anaheim Convention Center is the largest convention center on the West Coast and is surrounded by hotels and restaurants galore. They DO trade shows!

National Identity: People around the nation don't know where Orange County is located but they certainly know where Anaheim is. No other city in Southern California (except maybe Hollywood) has the national name recognition of Anaheim, California.

Executive Housing: The eastern part of the city of Anaheim has a vast collection of executive housing ranging from tract homes to custom estates. and oh, what a view! Wow, on a clear day from the hills of east Anaheim you can see to China...well almost. But certainly you can see to Catalina Island.

Business Friendly: The business licensing process is streamlined, the experience is friendly and helpful and the vast majority of information is available on line. Anaheim gets business and welcomes businesses of all shapes and sizes to its city.

Cheaper Electricity: Anaheim is the ONLY city in Orange County, California to generate its own electricity. Heavy power users such as manufacturing companies can experience a 20-30% savings on their monthly utility bills vs. Southern California Edison customers.

Great supply of commercial real estate: Years ago (in the mid 1990s), Anaheim rezoned the eastern canyon area into a redevelopment district and promoted business relocation with tax rebates and streamlined permitting. Anaheim was also able to provide development incentives which prompted a re-tooling of many of the obsolete aerospace manufacturing buildings in the city. Anaheim now has the largest inventory of new state of the art industrial space in Orange County.

Friday, January 16, 2015

Commercial Real Estate Advice Fit for my Family

Value of your location: The one thing that every business has in common is a location. Whether that location is a suite of offices, a manufacturing or distribution facility or is home based, all businesses need a location from which to operate.

A question that I get asked universally is what is my location worth today? Well, the great news is that if you own commercial real estate, specifically industrial space, your property has increased by close to 50% since January 2013...STAGGERING! We have now eclipsed 2007 levels  (the last high water mark for industrial values).

We are starting to see companies affect sale lease backs of their real estate to capitalize on the increased values. You can read more about sale leasebacks, here.

Rents have not moved as dramatically but we expect that to change within the next twelve to eighteen months. If you signed a lease in 2010-2012, plan on those rents being dramatically higher come renewal time.

Family advice: Tread cautiously in buying, renew your lease NOW.

Out of Space: Because the overall business climate is robust, we are seeing growth in industrial uses of all kinds. You may be facing a situation where you are out of space in your existing location. Let's face it, moving sucks! Moving is disruptive, expensive, and rarely achieve the efficiency you seek.

There are at least ten ways that you can stay in an existing location without having to suffer the disruption and expense of a move.

You can read about the ten ways to stay in your existing location, here.

Family advice: We have outgrown our location but don't want to move...10 ways to stay put.

Navigating the maze of commercial real estate: If you do find yourself in the maze of commercial real estate and MUST consider a move, I would offer this Family advice:

Start early. 12-18 months in advance of a projected move, a planned purchase OR a lease expiration is not too fact, it may not be enough time if your operation is particularly special purpose or complex.

Engage great help. Assemble a team of the VERY best service providers you can afford...a commercial real estate professional, a CPA, an attorney, a commercial insurance provider...ALL can be invaluable to you at various times during your move consideration. Some of these professionals are paid by the hour. Others are not paid by you the occupant but are paid their fee by the owner of the property that you lease or purchase.

Consider ALL of your alternatives. Even though you believe there is NO way that your existing location will work for just may have to make it work for a year or two. With 97 of every 100 industrial buildings occupied in Orange County, there are not many alternatives to choose from in the market. Also, owners are stingier with tenant improvement dollar and lease concessions than they were at your last lease origination.

Here is the message delivered by yours truly at an Orange County Business Group event yesterday...and by the way, I had two family members present.

Friday, January 9, 2015

10 Things an OWNER of Commercial Real Estate should Do...NOW!

The beginning of any calendar year is a GREAT time to plan for the NEW year with your commercial real estate.

As an owner of commercial real estate, you fall into one of two are either an owner occupant OR a non-owner occupant (investor). You may actually be both as several of our clients own the building that houses their business AND own leased commercial real estate as an investment.

The advice below appeals to BOTH types of ownership structures...owner occupant or investor.

Make sure ALL of your AGREEMENTS are current: Many times, owner occupants do not have a current lease with the entity that occupies the building that they own. After all, why should they? The rent flows from one pocket (you as the tenant) to the other pocket (you as the owner). Part of the beauty of owning your building is the flexibility to charge yourself (within reason) any rent the company can afford. Great!...but put it in writing. You can amend the lease if you need to change a condition. If you are an investor, make sure that your leases and extensions are up to date, that insurance coverages (and your tenant's) are current and appropriate and that your tenant has maintenance agreements in place for the systems that the tenant is responsible for maintaining.

Schedule a PERSONAL visit with your occupant(s): Easy enough if you are the owner occupant but a bit more time consuming if you are an investor with a multi building, multi state portfolio of real estate. If you cannot personally visit each tenant, make sure that your property manager or broker visits them annually. It is AMAZING to me the things that you learn in these visits...expansion plans, contraction plans, merger inquiries, a change in the tenant's business positive or negative, etc.

Take a look at the CURRENT MARKET conditions: I have several clients that engage me annually to prepare a broker opinion of value for their real estate. I charge a small refundable fee for the service and rebate the fee if a commission is earned through a future sale or lease. My clients are updated annually on the value of their real estate for estate planning purposes, partner entry or exit, and changes in their businesses direction.

REFINANCE: You heard it here FIRST...actually probably not...BUT, these Eisenhower era interest rates can't stay this low forever.

REVIEW any key dates that will occur this year: Options to renew, options to purchase, loans that mature, leases that expire, brokerage engagements...understand what they are and when they occur.

CREATE a method to track utility expenses: AB 1103, California's energy benchmarking law took partial effect in 2013, greater effect in 2014 and continues though 2015. Ultimately, if your building is a certain size and type you will be required by the state of California to report the energy usage of the real estate prior to affecting a lease, purchase or refinance of your commercial real estate. If you occupy owned real estate, this is as simple as accessing your utility bills. If you are an investor and your tenant(s) contract for utilities directly with the provider, you should work toward a sharing of this information. The new AIR lease agreement has a provision for this in a new addendum.

Examine any ZONING changes with your property: In two separate cases, with our clients this year, we have had a zoning change. In one case, the allowable uses were expanded and in another case the allowable uses were contracted. For existing occupants, this shouldn't be an issue but if your property is vacant, you would be well advised to update your understanding of the allowable uses within your zone.

Appeal your PROPERTY TAXES: This is really more of a down market task (we are solidly in an up market), but it's always a good idea to see how your property taxes compare with the current values.

Competitively BID your building's services: You should consider annually looking at your insurance, landscaping, parking lot sweeping, maintenance of the HVAC and roof contracts and competitively bidding the services. These controllable expenses can be reduced when properly managed.

Accomplish an annual roof, sprinkler and HVAC service: The best time of year for annual roof maintenance is in the dry months but NOW is a great time to have your HVAC units serviced before the hot dry months are upon us. Also, take a look at your sprinkler riser that protects the interior of your building. If a certification is required...don't delay.

Please make 2015 your best year ever!

Friday, January 2, 2015

5 PREDICTIONS for Orange County Commercial Real Estate...2015

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I LOVE this time of year...the holidays, college football bowl games,  recaps of the year gone by and PREDICTIONS for the year to come! So with 2014 almost in the books, what's in store for Orange County, California commercial real estate in 2015?

As industrial real estate is my focus (as opposed to office space or retail), these predictions will center upon what can be expected in the world of manufacturing and distribution space in Orange County, California.

Sales prices will stabilize: Since the beginning of 2013...only two years ago...we have seen sales prices for industrial real estate rise by a whopping 50%! That's right, a building that traded for $100 per square foot in January of 2013 would now sell for $150! AMAZING. All good things come to an end, someone famous once opined, as will the rise in sales prices, in my opinion. The reason is simple...the market just can't afford it! Cheap money and a thin supply of available inventory has fueled this price escalation but prices have risen to a point that leasing is now more economical. I actually dissuaded two clients from buying this year because the pricing is so crazy.

Lease rates will increase: Manufacturing companies are growing in Orange County...either organically or through acquisition. This growth creates a need for more space. As these growing companies visit the market for additional space to house their growth, they are met with 97 of every 100 buildings occupied. Concessions such as free rent, tenant improvement dollars and deep discounted rental rates are a thing of the past. These growing companies must secure any space they can and/or figure out a way to make the existing physical plant function more effectively. Additionally, we witnessed a record number of deals transacted in 2010 (five years ago) and 2012 (three years ago). Most leases of industrial space fall into the three or five year term category. Thus, a number of companies that signed leases in 2010 and 2012 will face a lease expiration this guessed it, will be forced to renew at substantially higher lease rates. The growth, record low vacancy, and higher renewal rates will, by default, cause lease rates to rise.

Gross absorption will decline: Defined as the amount of total square footage that leaves the market (leases or sells) each year, gross absorption will decline. The reason...simple...fewer availabilities will mean fewer deals this year. If you own a misfit toy, this could be your year!

Net absorption will increase: Defined as the difference between what comes on the market (new availabilities) and what leaves the market (leases and sales), expect the net absorption to increase this year (more will leave than come on the market). Remember those fast growing companies that will need expansion space and will find fewer availabilities this year? That's right, many of the remaining 3 out of 100 available spaces will leave the market (lease or sell) with no corresponding available inventory to fill the needs. Expect the vacancy factor to trundle down to around 2-2.5% this year.

Be prepared for a surprise: I have been cautiously observing this market for the past year. These record values scare me to death as 2014 feels eerily similar to 2007...record stock market, record low unemployment, commercial real estate values on the rise and then BANG...Thelma and the cliff we plummeted! I'm not sure what will be our demise...falling oil prices, the European recession, the devalued Ruble, a slowing Chinese economy, another cyber attack the likes of Sony, a drastic rise in interest rates? Who knows? Having witnessed the Phoenix of 2009-2014, nothing will surprise me.