Friday, June 12, 2015

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 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 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 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 time is avoided, avoiding 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 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!

Friday, June 5, 2015

If you Sell your Business, Should you Keep the Commercial Real Estate?

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The Background: I provide location advice to owners and occupants of industrial real estate in Southern California. Frequently, this advice results in a company buying a building to occupy. With prices notching up but with cheap financing, this in many cases can result in a rental rate cheaper than a market rental rate.

The rental rate I am referencing is the debt service achieved when applying the purchase price financed at today's low interest rates. When an ownership structure involves the owners of the business that will occupy the real estate - a terrific union is formed. The company pays the rent (debt service), and the owners benefit from the appreciation, depreciation, and stability of facility costs. What happens if the owner decides to sell the company (tenant)? Should the real estate be retained?
The Misconception: When the owner of the company and the occupant of the real estate are identical - but defined by entity - the owner of the real estate controls the decisions of the tenant - length of lease, annual increases in rent, tenant improvements considered, etc. When an owner of a company decides to sell the company (tenant) and retain ownership of the real estate some misconceptions occur.
  • The new tenant will run the business the same as the original owner
  • The new tenant will decide to stay in the real estate for many years
  • The new tenant will pay rent in a timely manner
  • The new tenant will care for the real estate the same way as the original "tenant"
While owning commercial real estate and the company that occupies the commercial real estate may prove to be a sound financial decision, owning commercial real estate while not owning the company may not be as sound. As an example, I encountered a private company that purchased a 50,000 square foot building for their use. The company occupied the building for eight years until the owners decided to sell the company. The owners retained the commercial real estate and signed a five year "leaseback" with the new owners of the company. The owners of the commercial real estate enjoyed a nice cash flow for five years. At the end of the five years, however, the company decided to vacate the building and relocate to a facilty in another state. The owner of the commercial real estate was now forced to compete with other owners of 50,000 square foot buildings - in many cases better capitalized - to secure a new tenant. The owner could not secure a tenant and the owner was forced to sell the building in an undesirable dip in the real estate cycle. 

The Solution: We advise many owners in this situation to write a new lease with the acquiring company and then sell the building as a leased investment to an owner whose core assets are similar. We then suggest reinvesting the proceeds of the building sale through a tax deferred exchange into an asset class with less risk...IE a multi tenant project OR simply paying the tax on the proceeds and investing in a non-real estate asset.