Friday, December 18, 2015

#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!

Friday, December 11, 2015

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.

Friday, December 4, 2015

#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.