Friday, February 27, 2015

I'll Just Wait to Renew my Commercial Real Estate Lease...No BIG Deal...or is it?

You are sitting in front of your computer and you get a note from the owner of your property. Your commercial real estate lease expires within the year and you assume that your landlord is writing to assess your interest in re-upping for another three to five years...that is what you assume.

In reality, your owner is writing to let you know that he sold your building, and that the folks that bought it are planning to move in at the expiration of your lease! Now you are faced with a costly relocation and the loss of a substantial amount of improvements that you have made to his building.

Just how did this happen, why would an owner do this, and what should you do in your next lease or lease renewal to prevent this from occurring again?

How this can happen. On three separate occasions, recently, my clients have been on the receiving end of the news above. It is devastating! Fortunately, in all three cases, enough time remained on the lease that we were able to maneuver and find new quarters or negotiate a short term renewal. But what if the opposite was true? The business could have been adversely affected...or worse fatally affected. Can an owner really do this to you...his faithful tenant? An owner can absolutely do this to you. After all, you, as the tenant, can play cagey up until your lease expires, move out and leave the owner high and dry. The owner can do the same to you with the only caveat being the new owner buys the building subject to your other words, the new owner can't simply cancel your lease , but can opt not to renew your lease.

Why an owner would do this. Simple. The owner doesn't want to own the building anymore.  Frequently, the owner needs to monetize the equity contained in the building for an estate tax obligation, to retire another debt, to satisfy the maturation of a loan on the building, or because he can't refinance an existing loan on the building. An owner can now recover his equity from a sale even if he overpaid for the building in 2006-2008 as values have recovered nicely from the doldrums of 2009, 10, and 11.

What you should do to prevent this from occurring. The first thing to do is realize that you are the best buyer for his building because you occupy the real estate and have paid rent on the premises for a number of years. Assuming you want to buy the building and can finance the purchase or write a check for the amount of the purchase, you are a seller's dream! Make sure you constantly remind the owner of your desire to buy the building if she ever wants to sell the building. Send the owner a letter or an email once a year to memorialize your interest.

Secondly, don't wait too long to engage your owner in a lease renewal conversation. If you want to stay and renew your lease, a year in advance of an expiration is not too soon. If your owner is reluctant to discuss an early renewal, your terror alert should read Decon 4...something is up!

The last thing, I would recommend is to consider your renewal rights and request a right of first refusal, the right of first offer, or an option to purchase the building when you negotiate a new lease or a lease renewal extension. At a minimum, you should have a market rate option to extend the lease for a term commensurate with the term of your original lease.

Saturday, February 21, 2015

My Commercial Real Estate Lease is Expiring...Now What? Part Deaux

Recently, I posted advice for a business whose desire was to stay in their existing location and renew their commercial real estate lease.

If you missed the post, shame on you, but you can catch up quickly by reading here.

Today, I want to offer advice to those businesses who have made a decision to move the operation to a new location.

So, in order of priority, below is my counsel:

Question your reason for moving. This piece of advice is FIRST on my list for a reason...because it is the most important! Please spend a great deal of time considering the reason(s) for your move. In my experience, companies generally are motivated to move by one or more of these five achieve a rent savings, to capitalize on a chance to own, to acquire a better building or location, affecting an up size or downsize, or achieving a better efficiency. Why are you moving? Reasons such as my landlord is a clown or I need a couple of extra offices really is not a proper motivation for enduring the cost and disruption of a move.

Figure out how much a move will cost. Moving is extremely expensive...both in absolute moving costs (machinery, offices, setting up the new facility, new collateral for the, stationary, business cards) and in hidden costs (loss of key personnel, loss of productivity, downtime, customer loss, etc.). Thus, a move should be delayed or postponed until absolutely necessary. I advise my clients to generate a couple of bids from a commercial mover so that the cost to move their operation is clearly defined.

OK, so now that you have stared at yourself in the mirror, have justified your move, and have a sense of the moving costs...what should you do next?

Engage great help. Generally, this help comes in the form of a project manager and a commercial real estate professional. A project manager can help you determine exactly how much space your company REALLY needs so that you don't lease or buy one iota more square footage than you need for today's operation and a modicum of future growth. The right project manager can also help you with plant layout; planning and permitting modifications in the new building; hiring architects, contractors, movers, office furniture vendors, IT, cabling, and phone providers, and the myriad other tasks involved in moving your operation from point A to point you understand how MAJOR of an undertaking a move actually is! The right project manager frees your time to run your business (to pay for the new facility) so that you don't have to worry about the details. A commercial real estate professional will identify potential sites for your relocation, can guide you through the market conditions, and help you negotiate the best deal with owners in the marketplace. A couple of subtleties here that you need to understand. More is not better in the case of commercial real estate professionals. You are better served to engage ONE agent to assist you in your search. Spend some time finding the RIGHT one and let her go. Also, you don't pay the commercial real estate professional...the owner of the building pays any real estate commissions.

Allow plenty of time. A properly conducted analysis of your operation, a well managed search and negotiation for the new space, and the move execution take TIME. Depending upon the complexity of your operation, you should allow twelve to eighteen months to accomplish a move.

Consider ALL of your alternatives. After you have ventured into the heavily owner oriented commercial real estate market in the OC today, you may realize that your existing location is not so bad after all. Please don't discount the possibility of staying in your existing location and renewing your lease OR approaching the owner of your building to see if he would sell you the building. Additionally, research your rights as to what happens if your lease expires and you are still occupying the building. Recently, we have encountered two situations where the owner of the building, that our client occupied, leased the space to a new tenant (thinking that our client was moving out on a certain date). Fortunately, we had anticipated this as a possibility and had made provisions.

Friday, February 13, 2015

Should I accept an unsolicited offer for my commercial real estate?

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A proposal to purchase your commercial real estate arrives in your email inbox at work or your mailbox at home...after all your tax bills are sent to your home...and that is probably how the offeror got your address.

Your property is not for sale, nor are you marketing the property for sale...but you are curious about the prospects of selling. So what should you do now?

I will make the assumption that you are remotely interested in the terms of the proposal (not necessarily that you are willing to sell).

My advice to you is contained within the following bullet points.

Before we address the question of whether you should accept the proposal, we need to understand a series of related issues about the proposal and the consequences to you of a sale.

Determine if the proposal is real. Some unscrupulous commercial real estate brokers will use the guise of a proposal from a dummy entity to determine if a property might be available for sale. Once they know you are a seller, they will busy themselves and find a real buyer. Others will send letters to property owners declaring their knowledge of a buyer that wants to buy your property (all the while with no understanding of your property).

Gauge the terms of the proposal vs the market conditions. An owner that I represent received an unsolicited offer on a property that he owns. The buyer offered a price in excess of the market value BUT asked for a fifteen month escrow and an option period of twelve months within the fifteen months to study the real estate. We discovered that the prospective buyer wanted to re zone the property to residential and the price that he offered was contingent upon receiving the zoning change. In essence, the lure of a high price was dramatically offset by the maybe of the zone change.

Assess the motivation and capability of the buyer. Why does the buyer want to buy your property? How will the buyer finance the purchase? What is the source of the buyer's equity? What else has the buyer bought recently? Will the buyer occupy the building as an owner occupant with his business? The answers to all of these questions should be thoroughly vetted.

Quantify the financial impact of selling your property. The sale of commercial real estate is expensive. There are real estate commissions (3-6% of the sale proceeds), federal income taxes (15-20% if held as a long term capital gain and 25-40% if not), state income taxes (in California up to 11%), ACA fees of 2.8% if in excess of $250,000, potential prepayment penalties of any outstanding loans against the property, escrow and title fees, and potentially others. Your CPA should run an after sale analysis of the proceeds you will receive. Sometimes, the after tax hit is too great to justify selling.

Consider what you will do with the proceeds of sale. Some sellers of commercial real estate affect like kind exchanges through a 1031 tax deferred exchange. Others simply pay the taxes and invest the net proceeds or pay off other debts. Regardless, you should consult your tax and legal professionals on the impact of either direction.

OK, so now we have done an admirable job of qualifying the unsolicited offer...the deal is real from a motivated entity, at market (or above) price and terms and you have decided that the after tax whack is manageable, and that you will use the net proceeds to pay off your beach house. Should you accept the offer?

My counsel to you, in today's environment, is that you should not accept an unsolicited offer. The market is so VERY active currently that you might be selling your property for far less than an actively marketed property will fetch.

The BEST way to achieve the highest selling price in the shortest period of time is by creating demand and competition. This can only be accomplished by listing the property for sale with a competent commercial real estate professional, creating a package, running a process, and marketing the property to ALL of the potential buyers in the market. Insist upon a fee sharing, freely cooperative listing team with other commercial real estate brokers...but get the property out'll be amazed at the results!

Friday, February 6, 2015

My Commercial Real Estate Lease is Expiring...Now What?

You knew, when you signed your commercial real estate lease some months or years ago, that this day was just didn't expect three to five years to pass so quickly! So now, as you approach your lease expiration, what should you consider?

This post is designed to provide counsel to you as you navigate your way through the maze of commercial real estate alternatives.

Before venturing into the marketplace, you should consider a couple of questions. Level with the way in which you answer these questions will dictate how you approach your lease expiration.

Is your goal to stay in your existing location and renew your lease? Would you prefer to move your operation to another location? As each direction is post worthy, today, I will discuss renewing your lease in your existing location.

If your goal is to stay: I would offer these suggestions to you if you want to renew your existing lease.

Engage some great expertise. This expertise can come in the form of a commercial real estate broker or an attorney. Each profession has its benefits. A CRE broker will not charge you for the effort as he seeks his compensation from the owner of the building once the renewal is completed whereas an attorney will bill you hourly. An attorney can advise you on lease language nuances but will not typically be well versed in market conditions. In my experience, both an attorney and commercial real estate broker are needed. The one thing that I would advise against is going the renewal route unrepresented. I have rarely seen this benefit the occupant.

Know where you stand. You may have renewal rights in your lease...options to renew, rights of first refusal, expansion rights, etc. Your advisor can walk you through your renewal options. One word of caution, here. If you negotiated your lease with a commercial real estate broker, your landlord may be obligated to pay that broker a fee if you renew. You are not obligated to work through the previous broker but it may behoove you to work with her if your relationship is in tact...after all, his fee and responsibility to you is precedent.

Contact your landlord. I suggest a call followed by a memorializing email. The essence that you want to share is that you are interested in renewing, you are considering your alternatives and you have engaged xyz to represent you. Your owner is now on notice that you are taking the renewal process very seriously and will respect the fact that your are approaching the important decision this way.

Grasp an understanding of the market. Now, your representative should educate you on current market conditions for a space such as rates, free rent concessions in the market, number of availabilities, recent comparable leases, etc. Get in the car and go tour some of the avails. You will be very happy that you invested the time.

Submit a proposal to your landlord. Based upon all that you have learned in the market, have your representative draft a renewal proposal for your owner.

Negotiate the best deal possible. Your owner is avoiding downtime, tenant improvements, and is generally paying a smaller brokerage renewal fee for renewing your lease. You are saving the moving costs, the disruption to your business, employees, and customers. Factor both positions into your negotiations.

Execute the agreement. Now its all done except the documents. Generally a lease renewal is accomplished with a one page lease amendment...unless the ownership of the building has changed since your last renewal or your lease origination.

If your goal is to move: OK, you will have to wait until next week. I promise you it will be worth it!