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!

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