An Improvement Allowance - A Primer

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I recently authored a piece entitled "The Commercial Real Estate is ALMOST Perfect - Now what?". If you missed the missive, no major misstep - you can click the link and get up to speed. One of the excerpts I want to explore today is:

"Once the true cost of the new offices is determined, we now must negotiate who pays - you, the owner, or some combination of you and the owner. Generally, an owner will be reluctant to pay for an improvement that adds value today but may need to be ripped out in the future."

There are circumstances in which an owner will in fact write a check, as a concession, for improvements to a space - in the case of a building in shell condition, or if the building is in need of some updating and the owner prefers to throw a wad of cash at the problem vs. doing it himself.

What follows are some issues to understand before you negotiate changes to the space.

What is it. By definition, an improvement allowance is a sum of money the owner of a building will invest in improvements to his building. These improvements could be new offices, new flooring, paint for the offices or warehouse area, expanded electrical circuitry, or truck door enhancements such as load levelers.

Turn Key vs an allowance. In a turn-key situation, you are requesting your new layout be entirely created by the owner of the building without a cost to you, the occupant. An allowance conversely, is a fixed amount of money the owner will spend on your layout with no guarantee the sum will cover the entire cost. If an allowance is all you can muster, make sure you understand the true cost of your improvement with adequate wiggle room in case of a surprise.

Not all deals. Understand that not all transactions will offer an allowance for improvements. We frequently see this in industrial deals. An owner will possibly freshen the offices with a coat of paint and some new flooring but will be unwilling to do much more.

What an owner will pay. Generally, an owner will pay for "general purpose" improvements - those that will be re-usable by future tenants.

Ways an allowance is paid, when and how. The best for you, the occupant is to have the owner provide a turn-key allowance as a concession. He produces your layout with no cost to you other than your timely rent payments throughout the term of your lease. The worst for you, the occupant, would be a complete repayment, with interest, of the improvement dollars the owner invests in the building.

SNDA. If a substantial investment is needed to shape your space into habitable form, make sure the lease you sign includes a Subordination, Non-Disturbance, and Attornment provision. Simply put, this clause will protect your investment and tenancy if your owner loses his building - your business home - through  foreclosure.

Management fee. One of the "gotchas" that exist within an allowance is the owner's right to charge you a fee for managing the process of building your improvements. Let's say the owner will invest $100,000 to mold your arrangement. Your construction costs $100,000. You're golden! Oops, the owner is charging you $5000 to oversee the construction. Now, your new arrangement is tipping the scales at $105,000 - guess who pays the $5000? Yep! The one reading this.

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When Should a Build-to-Suit be Considered

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We just sold a building located out of the state of California. Our client is an investor who purchased the Texas building to affect a tax deferred exchange.

Cash flow, ease of management, and the multi year lease had appeal to the buyer. For the next 10+ years, our client will enjoy clipping the coupons of rent payments. 

The building is leased long term to a Fortune 500 company. A build-to-suit was accomplished for the tenant four years ago.

So, what is a build-to-suit and when should one be considered? I believe one or more of the following circumstances would dictate building new versus buying or leasing an existing building.

Lack of availability. Industrial vacancy in Orange County, California is the lowest in history. 98 of every 100 manufacturing and warehouse buildings are occupied. If your company needs to grow into a larger building, chances are you'll be hard pressed to find one. The lack of available buildings should suggest a good climate for a build-to-suit. The trouble is - there is very little undeveloped land in the county. Even if you wanted to build a building, no vacant land exists to accommodate the build. In the case of the Texas building above, there were NO vacant buildings within the desired city - but a surplus of affordable, available, buildable land sites. Thus, the choices were - build or consider another city.

Special purpose building. This is similar to the circumstance of "lack of availability" yet very different. If you are patient, and occupied buildings are present in your market, eventually one will lay fallow, create a vacancy, and need a new occupant. A special purpose building contains features that don't exist in the market - a warehouse with 40' ceilings, or a building with acres of excess land for outside storage, maybe one constructed to store highly combustible or explosive contents. Our Texas building required tow of these - VERY high ceilings and acres of excess land for expansion and trailer storage.

A unique deal structure. Recently, a grocery distributor required a class A constructed warehouse building in a size that didn't exist in the city they desired. Additionally, the occupant wanted to own but couldn't afford to purchase land, build the building and carry the debt on a building under construction they couldn't occupy until completion. The solution was to interject a developer who purchased the land, built the building, leased the building to the grocery distributor and granted the occupant an option to buy the building once completed.

But, be wary of the following issues.

Lotsa lead time. Few if any occupants can predict their space needs two to two and one half years in advance of a move. However, you must allow this much time to complete a build-to-suit.

Complete understanding of the mechanics. The basic structure is - land is owned or purchased, new construction is planned and permitted, building is built, new construction is occupied. Easy, right? Yes, if you own the land, already have the plans drawn and permitted, have a bucket of cash to spend on the construction, and don't need the building for several months. Complexity is added with each un-checked box.

Financeability. You need to understand how the financing of a build-to-suit works. I could write an entire post on this subject, however, some of the highlights are - vacant land will generally need to be purchased for cash, a construction loan will precede the permanent loan, a couple of appraisals may be needed, land owners won't allow their loan (if seller carried) to be junior to a construction loan - are you yet confused? Exactly - not a simple transaction!

Understanding you will pay more. I discussed this in detail in a previous post entitled Build CRE and They will Come - Seven Reasons they Won't. I would encourage you to take a look at the reasons you will pay more to occupy a new build vs. an existing building. In short the reasons are - land prices, soft costs, entitlements, time value of money, financing, economies of scale, and market forces.

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You Own, you're Moving - Now What?

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Recently, I authored a post wherein I discussed making the ends meet in a commercial real estate deal. You can read the post here if you missed it.

During my discussion, I grazed a topic which today will receive a larger nudge - if you own your building and have elected to relocate, should you lease or sell the vacant building you leave behind?

A move generally is bittersweet - a cause for celebration because an increase in business created the need for more space. Good for you! But, the additional sales spawned another problem - you will create a vacancy. Now what?

In short, the direction you choose in dealing with the excess space and filling the vacancy depends upon several factors. Indulge me while I dissect a few of them.

The structure of your new deal. Are you buying the new building, leasing the new building or leasing the new building with an option to buy the new building at a later date? Chances are, if you desire to own the new spot and don't have a pile of cash lying around, you will need to sell the building you're vacating. Conversely, if your next space will be leased, you may be able to hold on to the old address.

Your desire to be a landlord. Owning and managing a leased building occupied by a company - not your own - comes with a set of headaches - and not necessarily a bottle of aspirin. Some of the painful biggies - who will vet the credit of the new occupant, what if the new guy fails to pay, can you float a lack of rent while you scour the market for a suitable occupant?

Can you afford to lease the existing building? Here is what I mean and how I counsel companies facing this dilemma. The market is the market. Prospective tenants will only pay you a rent figure for your building based upon what has leased recently and what other buildings are demanding in rent. So now you must roll up your sleeves, compute your costs to own the building (mortgage payments, property taxes, insurance, maintenance), add a reasonable return for the equity you have in the building and see where that squares with the market rent. You may believe yours is worth more. Maybe, but are you willing to wait? Remember, waiting is expensive. Lost rent for all the months you wait can never be re-cooped.

Do you require the vacant building's equity to fund the new location? This one is easy. I recently represented a group based in Whittier. So far past the building's capacity was their operation, we practically had to meet in the parking lot. I advised the company to move out, lease a new location with an option to buy, sell the original building and once sold, trade the equity into the new building. Had this company not wanted to own the new location - thus the equity wasn't needed - the advice might have varied and a lease of the relinquished building considered.

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Making the Ends Meet in Commercial Real Estate Deals

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Searching for a new building, negotiating a lease or purchase for said new building, closing the escrow or signing the lease, navigating through the city ordinances, getting phones, internet, and racking installed, AND meshing a move out of your current location and a move in of the new spot can be quite challenging - especially if there are some pressures at either end of the transaction.

Specifically, there is a bank with an outstretched hand - demanding a loan be repaid by a certain date - or they will foreclose. Or, there is a lease expiration looming which requires you to vacate your business home - and the owner of the building has sold or leased it to a new occupant. How about a property that has been acquired by an agency such as Cal Trans? - your structure will be demolished in order to widen a freeway.

Complicating matters is an objective by occupants to avoid a double payment. Who wants to pay for two buildings at the same time when your operation can only occupy one? Very few, indeed!

So what is a mother to do when confronted with these challenges? Indulge me as I make a few suggestions.

Start early. Many of the challenges of a move can be avoided or at least minimized by starting the process early. Some careful planning with a commercial real estate professional can prepare you for the current market conditions - how many buildings are available in your size range, how plentiful is financing and at what interest rates, what sort of lease concessions are frequent - free rent, improvement or moving allowances, what are the most favorable cities in which to relocate, etc. I generally believe a year to a year and a half is the correct amount of time to plan, execute and affect a move.

Be transparent. If you lease your location, sit down with your owner and let him know that you are considering relocating at the end of your lease. But, that you also want to factor in staying in his building as an alternative. If you've followed my advice below, you have some renewal and extension rights built in to your lease so this meeting with the owner needs to precede any time frame notices attached to the extensions. If you own your location, you need to decide if you will keep the building once you vacate and lease it to an occupant - other than your business - or if you will sell the building as a part of your relocation. I could write an entire post on this decision alone.

Factor in all the potential costs. Construct a model of all the potential costs of moving your operation - including the dreaded double payment. Planning for a double payment allows you to build this cost into your negotiation for the new space - and provide some timing flexibility. As an example, say you lease your present building. You pay $20,000 per month in rent. Your new location will cost you $40,000 per month and you've budgeted for this amount. The double payment is the combination of the $20,000 per month and the $40,000 per month - $60,000 per month. But, if you can convince the owner of the move up space to abate three months of rent ($40,000 x 3 = $120,000), you've effectively provided yourself with six months in the old space ($120,000/$20,000 = 6).

Conduct some research. My company leased office space in 1987. Our building was potentially in the path of the Santa Ana freeway widening - which meant our building was slated for eminent domain by Cal Trans and demolition. We did the deal but negotiated a sum for moving expenses.
Understanding your landlord's motivation can save you some agony. Is the owner planning to re-occupy your building at any time? Have expansion rights been given to other tenants that could affect your occupancy?

Negotiate extensions in your lease. I recently wrote about the various ways you can hedge against a move in the future by negotiating extension rights. You can read about that here. One of the most common extension rights in a commercial lease is the option to renew. In difficult times, owners will grant an option at pre-determined lease rates. When times are more robust, plan on an option with terms to be decided once you exercise your right. Regardless, this is your way of staying in your current location for an extended period of time without committing today - a beautiful thing for an occupant.

Is Time your Friend?

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Time frames vary in commercial real estate transactions. I've witnessed a lease completed in one week with a Fortune 500 occupant - with more counsel than a government litigant, a sizeable sale deal close in two weeks, and a standard industrial lease take over a year to complete.

Commercial real estate brokers try very hard to predict the time necessary to close deals - sometimes we are spot on - and sometimes our predictions run the way of millennium preppers.

So, what are the time killers in a deal and how do we manage the various owner and occupant  time pressures?

Basic transaction structure. A lease or sale deal begins with a search of available buildings and ends with the occupant moving into the building. Between the search and move-in are myriad time hurdles that must be cleared.

The search. Searching is easy in an occupant market as many available buildings are vacant and open for business. The opposite is true in an owner's market. A search can take several weeks longer - especially if some complexity exists in the occupant's requirement - an abundance of power, fenced staging area, a finite geography, an unconventional use of the building, etc. - there just aren't enough available buildings.

The negotiation. Clearly, owners will be much more willing to layer on concessions and respond quickly to offers, if the cobwebs darken the doorway and you're the only occupant they've seen for awhile. Arriving at acceptable deal points can be accomplished rather quickly with an ample of amount of owner motivation. If an owner is convinced he is the only boy at the dance, he may play a bit harder to get - thus delaying his response to your offer.

Deal execution. Will your deal require financing? If yes, plan on an appraisal, an environmental report and sundry other lender time munchers. If you're entering a lease arrangement, what form of lease does the owner prefer and how much legal time will be necessary to insure you are protected and knowledgeable about what you're signing?

Move-in. Will your use of the building require any special city or municipal approvals? If so, plan on weeks until you change your address. Are you able to occupy the building with no construction changes? You just saved yourself a few months by avoiding costly planning, permitting and building improvements.

Color on the examples above. The Fortune 500 company negotiated with a private owner ready to deal on a building ready to lease in a market ripe with availabilities. One week from first tour to signed lease. Sizeable sale deal was purchased by a buyer with money in a tax deferred exchange account with no loan requirement and the seller had all of the due diligence information recent and available. Purchase and Sale agreement was signed and the escrow closed exactly two weeks later. Standard was the industrial lease deal. Extraordinary was the use which required a conditional use permit. One year from signing the lease, the occupant was allowed to move in.

Are you Getting the MOST from your Commercial Real Estate Broker?

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I recently conducted a training session with a collection of commercial real estate brokers. I asked the group how many would agree to market a commercial real estate listing without a signed exclusive arrangement with the owner of the property. No hands were raised.

Next, I polled the group to find out how many would search for a building on their client's behalf without a signed agreement. Every hand shot up.

As I pondered the reason for the difference in direction, it occurred to me.

When we approach an owner of a building and discuss finding a tenant or buyer for the vacancy, we spend our time describing our process in locating the tenant or buyer. Generally, the marketing process includes signage, brochures, mailers, web presence, virtual video tours, entry into the multiple listing services, broker open houses, tours of the property with prospective occupants, receiving offers, vetting potential buyers or tenants, and execution of the sale or lease. These steps are tangible and measurable. Also, we are asking the owner to compensate us if we successfully lease or sell his building - thus the need for the contractual relationship.

Now consider our process when we search for a building - that silence you hear is deafening. You see most commercial real estate brokers don't have a process for searching - just a process for marketing a vacant building. Therefore, when you ask a commercial broker to find you a building, the disconnect occurs - and you are getting shortchanged!

So, how do you get the most out of your commercial real estate broker when searching for a building? I would suggest doing these things.

Interview three brokers. Select the one that can clearly describe the process he will employ to find your new business home. Pay careful attention to the way in which he will send notices to cooperating brokers, review the submittals, preview the alternatives, conduct the tours, request proposals or draft officers, analyze the responses and monitor the escrow or lease phase.

Engage one - in writing. Sign an agreement with the broker of your choice. Stipulate you are engaging him for a period of thirty days with a right to cancel the agreement if you are not satisfied with the results. Let him conduct his process without worrying about waking earlier than his competition and showing you a property he knows few details about. Allow him to WORK for you and find you the very best deal available. Make him a member of your team and heed his advice on procedure.

Enjoy the process. I can assure you'll be pleased with the results. You will also save yourself time, effort and money - and the right home for your business.

Are You Focused on the Tip of the Iceberg?

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We've all heard the expression, "that is only the tip of the iceberg". Made common when the Titanic met its untimely demise in the frigid North Atlantic, the expression has a commercial real estate application as well.

As occupants of commercial real estate, you focus upon a couple of things - the space and possibly the lease payment or monthly debt service. The space - does the physical space lay out well for your operation? Are there enough private offices for a collaborative work environment? Does the power into the building adequately support all of your machinery and equipment? Can  you afford the monthly payments? If these boxes are darkened, boom! You're golden, right? Maybe not so rapido.

If you focus upon the space and the payments, you only are seeing the "tip" of the iceberg. Akin to the iceberg, more than eighty percent of the transaction's issues are lurking beneath the surface and can destroy your occupancy if not properly anticipated. So what unforeseens are you navigating? Indulge me while I discuss a few.

The ownership of the building. Let's assume your operation requires a substantial capital investment by the owner of the building - you need offices built, a loading door added, or the power upgraded - does the owner have the money to accomplish this for you? If your heart is set on owning the building you're considering and the owner wants only to lease it, how will you overcome this obstacle? Finally, is the owner someone with whom you want to do business? A quick survey of the owner's tenants will tell you much about how the owner operates his properties.

Lease agreement. Generally, commercial real estate leases have "gotcha clauses". Who pays for the roof if it needs replacing? What happens if the operating expenses on the building increase? If your building owner's lender forecloses, is your lease terminated? Does the rent schedule have annual escalators? All of these issues should be fully investigated and understood before you sign on the dotted line.

Market conditions. You've heard owners are motivated these days and the market is dying to give you several months of abated rent. Or, you drive down any industrial street only to be greeted by multiple marketing signs advertising availability - there must be tons of space available, right? How many other occupants are competing to buy or lease your dream space? It's best to know where you stand before opening negotiations with a building owner.

Occupancy requirements. Your plans of opening for operation can be splintered like a ship's hull if you don't consider the city's requirements for your use of the building. A quick on-line search for zoning and allowable uses should give you an idea of any potential hurdles.

Your credit worthiness. All building owners look at tenancy and credit worthiness differently. A private owner may only care timely rent payments. A real estate investment trust may concern itself with your audited financial statement. Regardless, arm yourself with the knowledge of your space's owner and view of credit.

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What is an OCCUPANT Premium?

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Also referred to as a user premium, an occupant premium is the price an occupier of commercial real estate will pay compared to a commercial real estate investor.

As both occupiers and investors "invest" in the commercial real estate, the distinction I draw here is an occupier owns the building - owner occupant - and operates a business from the building versus an investor who owns the building, doesn't occupy it, and relies upon the rent paid by a tenant to underpin his investment.

Historically, owner occupants pay more for commercial real estate than investors - in some cases 20-25% more. So why would that be the case? I believe the following factors motivate the pricing difference.

Financing. Generally, a buyer of commercial real estate that will occupy the building has more options with which to finance his purchase. He can employ conventional bank financing which requires a 20-25% down payment, a 90% loan through the Federal government - Small Business Association loan, or private funding through friends and family. Typically, investors must rely upon debt with much lower loans to value - 60-70% - which means much more cash invested. Certainly, there are well heeled investors who can stroke a check for the entire purchase without the need for financing but these investors want a "deal" for tying up cash. OK, you may ask, why does the cost and availability of money motivate a buyer to pay more? The easy answer - payments. If money is cheaper, the resulting payment will be cheaper. An owner occupant can pay more because they can frequently borrow more.

Assumptions. An investor buys an income stream - a leased building - which is generated through a tenant paying rent. Assumptions must be made as to the sustainability of the income, whether the income is above or below the current market lease rates, and the likelihood the tenant will remain in the building after his lease expires. If an investor believes he will suffer a vacancy because the tenant can't pay the rent or believes the tenant will vacate at the end of his lease, he must hedge his purchase by paying less for the building. Because an occupant buyer is the "tenant", all of these costly assumptions are avoided.

Return on investment. The way in which an owner occupant views a return on investment is varied from the investor. An owner occupant takes a look at the payment his loan creates, adds the operating expenses (property taxes, insurance, and maintenance) and compares the total payment to a comparable market rent. If the total payment is within a reasonable range - doesn't exceed the market rents by 20% - boom! He's in. A much more complicated analysis is performed by the investor. What is the income? If the income is above market, he discounts it. How much can I borrow based upon the income - or discounted income? Now, the income must provide a sufficient return for the risk being taken by the investor - around 5-6%.

Utility. The way in which the building currently is or will be occupied is of little consequence to the investor. His concern is the marketability of the building if it becomes vacant. How long will it lay fallow? Will the building's features appeal to a wide range of prospective tenants? Can I cause the income stream to increase over time? An owner occupant views the building akin to the purchase of a machine or the addition of a key employee - will the building allow my business to grow? If so, the cost of the real estate is a cost of doing business.

The Commercial Real Estate is ALMOST Perfect - Now what?

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You have conducted an exhaustive search with your commercial real estate adviser and have happened upon the perfect space to house your rapidly growing company.

There are just a couple of deficiencies with the building that can easily be remedied - or so you believe.

What appears to you as an easy fix may in fact be a big deal depending upon the nature and motivation of the ownership.

I'll just add an office or six. Let's take for example the addition of some offices so that your key employees can operate within a private setting. You look at the existing layout and figure with the removal of a couple of walls here or moving a door there, you are golden. What many fail to realize is the cost, permitting, time, and effort required to simply add a couple of offices. Adding office is expensive! Simply moving a wall doesn't account for the air conditioning ducts that must be re-routed, the ceiling grid that is interrupted, new Title 24 energy efficiency upgrades that are triggered, the holes left in the flooring, and additional parking spaces that may be required. The offices will need to be permitted. A layer of bureaucratic challenges awaits the unsuspecting. Once the true cost of the new offices is determined, we now must negotiate who pays - you, the owner, or some combination of you and the owner. Generally, an owner will be reluctant to pay for an improvement that adds value today but may need to be ripped out in the future. Consequently, most owners will dump that cost onto you, the occupant. If an owner has the money to invest in tenant improvements, he may want to be paid back for those improvements over the term of the lease. This is known as amortizing the tenant improvements. Simply structured, the cost is multiplied by some factor of money and divided over the term of the lease to calculate a monthly amount which will be borne in addition to the base rent.

Lights, camera, action. Ok, maybe you need to increase the electrical service into the building so that your machinery runs smoothly. Easy, right? Ummm, not necessarily! Power into an industrial building originates at the transformer. In modern buildings, the power is then routed underground through a conduit into a switchgear located in the warehouse. So, adding power becomes a function of how much is available at the transformer, how large the conduit is into the building and the size of the switchgear. All boxes must be checked in order to economically upgrade the power feed into a building. If the transformer capacity is insufficient, the utility - SCE or a city power utility - will need to replace the transformer. If the feed into the building is too small, the pavement will need to be jack hammered, conduit replaced, and the switchgear changed. Yep, you guessed it - at a significant cost.

Who's next door. The space may work but is your use of the space compatible with the neighbors and allowable within the zoning? If not, you will face some cranky folks next door and a city with reams of paperwork for you to complete prior to your occupancy being approved. By the way, if you undertake a conditional use permit process, plan on the next six months of your life being consumed in minutia. Oh, and by the way, your owner may require you to lease the space regardless and place the risk of getting the use approved on your shoulders.

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The BIGGEST Mistake Occupants Make

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The biggest mistake occupants make? Believe me, I've seen some doozies!

But, in my opinion, the biggest mistake I see occupants of commercial real estate make is - not considering their existing location when contemplating a move.

After all, why would they consider their existing location - they are moving!

Well, in no particular order here are the reasons why an existing location should be considered, re-considered, and re-re-considered before incurring the expense and disruption from a move.

Moving sucks. Moving is expensive, disruptive, and rarely achieves the kind of efficiency an occupant seeks.

The market is tight. As I have written about ad nauseum, we are steeped in an owner's market. Although your belief may be, there are greener pastures - the reality is those green pastures are akin to drought tolerant lawns - tinged with brown these days. With 98 of every 100 buildings occupied, there are very few viable alternatives available for your consideration. Said another way - there might not be a better building in the market for you.

There are at least ten ways to stay in an existing location without incurring the cost of a move. You can possibly add office space, expand the building, install a production mezzanine, store product out doors, use the cube height in your warehouse, purchase a Kardex Remstar machine which can manage 10,000 sf of floor storage in 1000 square feet of floor storage space, outsource a function, use a third party logistics company to warehouse for you, stay put and lease space close by, add a second or third shift. All of these should be considered before you spend a dime moving.

Strategic value. Even if you absolutely, positively cannot stay in your current location, you can still use the location strategically to make a better deal in the market or motivate your existing landlord to sweeten the deal if you stay.

Are You VITAL to Your #CRE Clients. TUESDAY Traffic Tips.

Today, I relay a story about this situation that happened to me recently. This and much more on this week's VIDEO Tip.

Are YOU Invisible? TUESDAY Traffic Tips

Are YOU Invisible? TUESDAY Traffic Tips. Over 75% of commercial real estate searches begin on-line. Can you afford to be INVISIBLE? Today, I discuss two easy ways to make sure you can be found on-line. This and much more on this week's VIDEO Tip.

http://thebrokerlist.com/

Should you Lower Your Asking Price?

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Sellers of commercial real estate in Southern California have benefited greatly from an imbalance of supply and demand.

Too little supply coupled with a healthy demand. Only one way for sales prices and lease rates to go - straight up!

Fueled by declining available buildings and record low interest rates, sale pricing's steady upward march started in January of 2013 and, in my opinion, peaked in the first quarter of 2016. Lease pricing started the race to the top about a year later and probably has some track to run before reaching a checkered flag.

If you want to sell your building, you should consider a pricing strategy that reflects today's market. All those crazy numbers buyers paid a year ago, don't occur as much today - unless your offering checks all the boxes - and still probably not. Buyers are savvy. Their advisors are well informed. Everyone knows we are at the top and are proceeding gingerly - lest they make a costly misstep.

We recently sold a building in North Orange County. A competitor acquisition by the owner of the business and building created the desire to sell the building. Better suited for the combined operation was the competitor's location. The building we sold became the odd man out and therefore was slated for disposition.

Carefully analyzed were the market comparables, the currently available inventory, the building's amenities, and work that was necessary pre-sale. Our pricing recommendations were two fold - higher price with the seller paying for clean up and lower price without seller paying for the clean up. Opting to sell without spending the dollars to re-condition the real estate, was our client's decision.

We priced accordingly and sold the building in two weeks. Fortunately, our seller listened to us. Too often, a seller will take the high end of the range - in our case the recommended price if clean up dollars were spent by the seller - and not accomplish the refurbishment. All while rationalizing, "let's see what we get". A dangerous approach in today's market. Buyers will pay top dollar but the building better be perfect.

You may be wondering, hmmm, if we priced higher and deducted the clean up costs, wouldn't we have sold for more? Fair question. The answer was no, in this case. Had we priced at the top, conducted buyer tours, explained the property was being sold in its present condition, and fielded offers - the requested refurbishment discount would have far outstripped our "discounted" asking price. A buyer's perception of refurbishment costs always exceeds reality and they offer accordingly.

Ok, you might say, "I can always lower my price, I can't raise it." True to a point. What sellers frequently underestimate is the message pricing sends to the market. Priced too high - man, that building must have solid gold toilets. Or, that guy must be smoking the good stuff. Priced too low, a frenzy is created, multiple offers are generated, and asking price surpassed - in some cases.

Pricing an offering correctly - possibly a bit low - is so much easier than coming out with a super high un-achievable price and later reducing the asking price. When you commence the retreat in pricing, the market crosses its arms, waits, and says - "see, I told you that building was overpriced!"

In #CRE, It ain't over 'till it's OVER. TUESDAY Traffic Tips

How many times have you lost track of a requirement that passed on a listing only to find out they are still in the market? On the occupant side, if your guy likes a building that is in play, do you follow through until the building leases or sells? I discuss these items and much more on this week's VIDEO TIP.

If Commercial Real Estate was EASY - Everyone Would do it!

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Today, I want to discuss a collection of deal challenges that currently clog my consciousness.

If your commercial real estate professional makes the transaction process look easy - rest assured, it's not!

By the way, I am grateful to all of our clients we have the honor of representing - challenges or otherwise.

Beating the foreclosure deadline. A lender Notice of Default (N.O.D.) is the kiss of death. The drum beat of foreclosure echoes, the offering is tainted, and we must disclose the status. In general terms, a lender files an N.O.D. when the borrower is delinquent on mortgage payments. The borrower has 90 days to cure the default by paying the past due amounts. If the borrower fails to bring the loan current, the lender can file a Notice of Trustee Sale and sell the building. We are racing to get the building sold. As you can appreciate, the market smells blood, which makes our task more difficult.

An occupant driving too hard a bargain. Currently, we represent an occupant in their quest for space. The occupant has benefited marvelously from past down markets. We have moved them twice in the previous six years. In both instances, owner concessions abounded and our folks got a great deal. Now the landscape is different. The market is heavily tilted in the owner's favor. Concessions such as free rent, reductions in the asking rates, abundant improvement work rolled into the lease, and bonus broker fees are a distant memory - except to our client - who is stuck in 2012.

Renewing a lease early - with a rent above market. Our client signed a lease before the market correction of 2009. Renewal time is approaching but our client is stuck with above market rent for a period of time. Our client wants the certainty of knowing he can remain in the building at the conclusion of his lease. He realizes he is paying (and has paid) an above market rent for several years. Our client is willing to renew early but wants some reset of his rent. The owner is unwilling to reduce the rent today in return for a longer term. The owner believes the market is trending higher and is willing to wait.

An ownership squabble. We represent an ownership entity with two owners. One wants to lease, the other wants to sell. Each has very compelling reasons why their deal structure benefits their objectives. Marketing an availability with warring factions in the wings causes confusion. Fortunately, we have the benefit of time and no lender with an out-stretched palm.

So what is the takeaway, here? A rising tide lifts all boats. With time, any problem can be solved, ownership issue resolved, and "right deal" located. Just make sure you manage the expectations.

BIGGEST #cre Time Wasters? TUESDAY Traffic Tips

I'm a BIG believer in face to face meetings. I tend to meet whenever a client or prospect will agree to see me...and sometimes when they won't. Are face to face meetings a waste of time, however? I discuss this and much more on this week's VIDEO Tip for commercial real estate.

Unrealistic Expectations with Commercial Real Estate...5 MUSTS

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Southern California is deeply entrenched in a commercial real estate owner's market. Currently, 98 of every 100 industrial buildings are occupied.

This is the skinniest vacancy I have witnessed in my four decades as a commercial real estate broker!

Cheap money and lack of available buildings have caused sale values to eclipse pre-great recession highs and lease rates are close to the top as well.

In short, it is a great time to be a commercial real estate owner.

One of the ugly offspring an owner's market breeds is unrealistic owner expectations.

Today, I want to counsel you. If you choose to be unrealistic in your expectations, examine the following to see if they are in your favor.

Staying power. Make sure you can  endure the time necessary to achieve your unrealistic expectations. We recently accepted an assignment to sell a building. More is owed on the building than the market value - even the inflated values of today. A couple of events have caused one of the lenders to commence foreclosure proceedings. The sharks are now circling. Not a good time to be unrealistic. Another owner hired us to lease his building. When we were engaged, the building had been vacant for over a year. We believed the asking rate was inflated by 30% and expressed this concern to the owner. He didn't care. He had staying power. He owned the building - with no debt - and could afford to wait for the right tenant. His gamble paid off. We leased the building at his asking rate - albeit another year later!

A good grasp of the trends. What is the general trajectory of pricing - up or down trending? Are more buildings entering the market than are leaving? What has recently leased or sold and at what price and terms? In the first example above, several new for sale buildings have become available since we commenced our pursuit of a buyer. This submarket is now slightly tilted in favor of buyers. In example number two above, the supply actually decreased during our marketing - which meant we were one of the few remaining buildings available.

A keen understanding of your competition. I know you believe your building is best in class. But, is it really? My experience suggests the highest pricing at the best terms is achieved on the best available buildings - the ones with the most amenities. If your candidate lacks a key amenity, your pricing will most likely suffer. Your advisor should provide you with a steady stream of market intel so you truly understand your competition.

Complete knowledge of your occupant's situation. Before you approach your occupant with an unrealistic lease renewal, I would suggest you ask a few questions. How's business? What are your occupant's plans at the conclusion of his lease? Is your occupant the target of any acquisition activity? Are the owners of your occupant's business getting a bit long in the tooth and approaching retirement age - thus looking to cash in and sail into the sunset? Do you deal directly with your occupant or does he have a commercial real estate advisor? The answers to all of these questions will guide your direction.

An awareness of a vacancy cost. Can you afford to pay for an empty building? For how long? Remember, your ability to outlast your unrealistic expectations is the key. Vacancies are costly! In most instances, originating a new tenancy will cost you 20-25% of your future income. The bulk of that cost is paying for the building while it is vacant and the abated rent that most occupants seek.

The Yin and Yang of Commercial Real Estate Subleases

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Subleases. I avoid them at all costs. Why? Because subleases are generally unfavorable to the original tenant (sub-landlord) and landlord (master landlord), risky, and complicated. Sometimes, however, a sublease cannot be avoided and in isolated cases some benefits inure to the parties. What follows is a review of the ups and downs of a commercial real estate sublease.

What is a Sublease? When a tenant must relieve himself of a lease obligation prior to the expiration of the lease, the need to sublease occurs. The lease of commercial real estate has a landlord and a tenant. The two parties agree to a term (commencement and expiration), an amount of rent to be paid monthly, any annual increases in the amount of monthly rent over the term, and any concessions - abated rent, building improvements, and pre-possession clean up. The points are memorialized into a lease agreement and both parties sign. Every effort is made by the tenant to live up to the terms of the lease. Occasionally, the tenant finds himself unable to fulfill the lease obligation - outgrows the building and must move, is acquired by a competitor and finds the space is redundant, or the sales of the business no longer support the rent payments - just to name a few examples. In a sublease arrangement, the landlord becomes the master landlord and the tenant becomes the sub-landlord. The new occupant is referred to as a sub-tenant. Confusing, huh?

A sublease is unfavorable to the tenant. The tenant is committed to the landlord for an amount of rent over a period of time and very few landlords would let the tenant walk without a hefty penalty. A sublease is akin to a "fire sale" - the lease is no longer needed or wanted - and thus must be liquidated. The tenant (now the sub-landlord) is desperate to get rid of the excess space but has very little leverage with which to negotiate. Additionally, if a sub-tenant is located, and a deal struck, the original tenant is still on the hook if the sub-tenant does not play nicely - fails to pay rent. Another unfavorable factor is the term remaining on the lease. Most prospective tenants seek a three to seven year lease term. If the term of the sublease has fewer than three years remaining, the sublease has less appeal to prospective tenants in the market. Occasionally, a landlord will capitalize on the shortened term, realize the term is less marketable, and use the tenant's desire to liquidate as a means to secure a new tenant.

A sublease is unfavorable to the landlord. A layer of risk and complexity is added with a sub-tenant. The tenant with whom you negotiated and transacted is now vacating your building. Although the tenant is still obligated for the performance of the lease, another party (sub-tenant) is now your occupant. To a certain extent, your original tenant's faithful rent performance is dependent upon the sub-tenant - sub-tenant pays the tenant and the tenant pays you. Frequently, if the remaining lease term is fewer than three years, a prospective sub-tenant may want a longer term. You now must commence negotiations several years sooner than you anticipated. You must now decide - well before the old lease expires - what your attitude is on a longer term.

A sublease is risky for the sub-tenant. Subleases are generally taken "as is - where is". Remember, the sub-landlord (tenant) is out and consequently doesn't want to spend any money refurbishing the space. The normal concession package of abated rent, building improvements and clean up are rare with a sublease. You may be asked to vacate at the end of the sublease term because you will not have any options to extend or any renewal rights. What happens if the sub-landlord (tenant) fails to pay rent? Your position is compromised - or worse - you get evicted!

Sometimes benefits occur. Subleases appeal to new companies with little or no credit history. A sub-landlord (tenant) is less concerned with credit - after all the sub-landlord (tenant) is still obligated. Subleases are advantageous for fast growing companies. Because a shorter term remains with a sublease, a fast growing company has the flexibility afforded with a shorter term - they are not committing to a long term obligation. As revenue and employee growth are uncertain for these companies, the shorter term works. Sometimes, the market rate for new leases is greater than the rate for a sublease - a sub-tenant can save money. On the flip side, a sub-landlord (tenant) can make money. Just make sure your agreement allows you to reap any profits taken from a sublease.

#CRE Transparency TUESDAY Traffic Tips

How transparent should you be with your clients and fellow brokers? Today, I give you my take on transparency. This and much more on this week's VIDEO Tip.

Are You PREPARED to Make a Commercial Real Estate Deal?

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You've decided that now is the time to sell your commercial real estate. Many factors have brought you to this place. We won't discuss those reasons today. Or, selling is not your thing and you believe it's best to find a tenant for your vacant building and commit to a long term lease. On the flip side, you are an occupant whose business need has propelled you into the market to find a suitable location to house your business. You may choose to buy or lease a location. 

Regardless which side of the transaction your interest lies - owner or occupant - are you prepared to make a deal? Let's quarter this question and analyze all four positions - owner selling, owner leasing, occupant buying, occupant leasing. 

Owner selling. A funny thing happens when you market your commercial real estate for sale - folks want to tour, questions arise, issues surface - you get offers! Now what? Well, you respond to the buyers and negotiate the transaction, right? Sometimes, not that easy. Occasionally, owners are un-prepared for the inevitable - actually making a deal. Make sure you've engaged good tax, legal, and commercial real estate brokerage assistance - before you take your property to market. Know the tax impact to you of the sale and create a strategy for the proceeds. - will you pay the tax or exchange the gain into another building? What contract form will you use to execute the sale? There are some good standard documents such as the AIR Purchase and Sale Agreement, but will this contract provide adequate protection for you as the seller and enough representations and warranties for the buyer? Your commercial real estate broker should provide a complete review of the market, financing scenarios for potential buyers, and a means to vet prospective purchasers and their ability to close. Often the best buyer is not the buyer who offers the most. Finally, you should consider completing some pre sale inspections of the roof and air conditioning and adjust your asking price accordingly. You're ready. Bring on those buyers! 

Owner leasing.  Equally important in leasing your commercial real estate, is assembling your tax, legal, and brokerage team. The primary differences in a sale and lease are the tax impact to you and the nature of the relationship with the occupant - you are not generating a pile of cash that is subject to taxes and you are creating a three to five year "marriage" with the occupant. Things such as the occupant's use of the building, the occupant's credit worthiness, your means and desire to fund tenant improvement costs and brokerage fees must be carefully planned. Remember, you're not closing a sale and receiving any cash. How will you fund the costs of the transaction? You're making a credit call. What will you require from the prospective occupant to insure you receive all your rent in a timely manner?

Occupant buying. Before you jump in the car to look at the new building that popped up down the street, get yourself pre qualified for financing. Period! Will your use of a building require any special permits? If so, have knowledge of the time necessary to perfect these permits. Have a handle on your cost to move. I've seen this derail many deals when occupants underestimate this cost. Finally, create your buying entity - LLC, etc. and sit with your tax professional to understand the tax impact of owning vs. leasing commercial real estate. Ok, let's see what's down the street. 

Occupant leasing. Similar to buying in your preparation, but different in the financing. You are not seeking bank financing for a purchase. You are, however, persuading an owner to "loan" you the use of his building for three to five years in return for paying him rent. Make sure your tax returns (personal and corporate) as well as financials (personal and corporate) are complete, up to date, readily accessible and easy to forward. All owners will require a review of your credit worthiness. Submit your financials with your offer to lease. You'll save tons of time and get a speedier response. 

#CRE Professional Designations...worth it? TUESDAY Traffic Tips.

#CRE Professional Designations...worth it? Congratulations to our colleague Andrew Cheney for achieving the CRE, Counselor of Real Estate...only one of forty five in the WORLD with the CCIM, SIOR, and CRE designations. So, are these designations important? Or just a string of letters next to your name? I discuss this and much more on this week's VIDEO TIP.

#CRE Problem? Try This. TUESDAY Traffic Tips

Today, I discuss a method for solving problems. This method is practiced widely by our younger counterparts. Why? Because it works! Try it. You won't be disappointed. This and much more on this week's VIDEO Tip.

Unrealistic #CRE OWNER Expectations. TUESDAY Traffic Tips

Happy Birthday to my friend David Newton! Today, I discuss a way to get your commercial real estate owner's expectations in line with the market. This and so much more on this week's VIDEO Tip.

With an EXPIRING Lease, you'll make ONE of TWO Decisions

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Today, I want to discuss your commercial real estate lease agreement - you know, that twelve page document you gave a cursory review before you signed your John Hancock - the legal sized occupant of your bottom desk drawer - that tome you swore you would review at the beginning of the year and didn't - and here we are.

The goal today is to make sure the decisions are yours to make and not foisted upon you by the owner of your building.

When your lease expires you will make one of two decisions - you will stay or you will move. Let's do a deeper dive into both decisions, shall we?

You have decided to stay. Do you have the right to stay? In other words, does your lease contain an option to renew? If you don't have an option, have you spoken with the owner of your building to see if another lease is in his plans? Let's presume your lease has an option to renew. Most options contain time frames which are sacrosanct. You have a specific period of time in which to exercise the option - your desire to stay put. If you miss the exercise window, you may not be bounced, however, those carefully negotiated option terms may no longer be in force. With no option to extend, you should determine well in advance of your lease expiration your desire to renew. Engage your owner early - 12-18 months before your lease expiration and craft a renewal agreement. In the event, your owner has another idea - he's decided to sell your building and not renew your lease - you have adequate time to look for a new home for your business.

A move is in your future. The business has eclipsed all growth projections and the only way to continue the upward sales trend is to relocate to a larger building. Should you look for something to buy or should you consider a lease on a larger building? Two pieces of advice, here. Allow plenty of time to look at buildings, arrange financing (if you are buying), and lose a couple of negotiations. And, engage great help to shepherd you through the maize of commercial real estate availabilities. Unlike residential availabilities, commercial availabilities are not widely viewable on line. Sure you can scour LoopNet, however, LoopNet is designed to give you just enough information to prompt a call to the owner's broker. You really can't rely on the available data contained and the information is not readily searchable - especially if your operation requires a special feature such as an abundance of office space.

Is there a third decision? Absolutely! You can opt to do nothing, allow your lease to expire, and continue on a month-to-month basis while you plot your future. The problem with this strategy? Generally, commercial leases contain nasty little creatures called "holdover" provisions. Your owner has the right to increase your rent by as much as 200% if you occupy the building past the expiration. Some owners are adamant about imposing these holdovers - so beware! Without a lease in place, your owner can sell the building to an occupant who will soon be sitting in your office while you are loading the moving van - it happens! If you find yourself in a quandary, I would suggest renewing your lease for a short term - one year - until you get the space requirements figured out. If your owner will do this, you will save a innumerable amount of money and avoid a forced move.

The OFFICE is NOT your Friend. TUESDAY Traffic Tips

Today, I discuss how much of your day should be spent in the office. This and much more on this week's VIDEO Tip.

Backup Position in a Commercial Real Estate Deal...Now What?

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Recently, I discussed how a seller should handle multiple purchase offers on a parcel of commercial real estate.

Key to a seller managing multiple offers - assemble the due diligence information before taking the property to market, make sure all of the buyers are operating with the same set of facts, be transparent when dealing with buyer's brokers, create a spreadsheet with all of the offers and note the differences, choose not one, but two buyers.

Today, I want to discuss how a buyer should behave if in back up position. Back up position is first loser, however back up position is a consolation prize of sorts. If the original buyer fails to perform, you get the nod as the back up buyer. Below are suggestions to maximize your position as the bride's maid.

Get your back up position in writing. If the seller of your dream building truly is allowing you to be in back up position, he should be willing to create a contingent contract with you. The contingency is the failure of deal number one. If deal number one fails, then the seller pivots to your deal. I would discourage a verbal agreement that places you in first place in the event the original deal craters. This structure is an agreement to agree and affords you nothing.

Conduct your due diligence simultaneously with the original buyer. Most contracts to purchase commercial real estate include a contingent period of time for the buyer to obtain financing, inspect the building, and review the title report among other things. During this "contingency period", the buyer has the right to disapprove items not satisfactory and ultimately cancel the transaction if something untoward is discovered. I counsel buyers, in back up position, to conduct their inspections as if they are the original buyer. On the one hand, the back up buyer may be wasting his time - if the original buyer performs. However, if the original buyer changes course, asks for a price reduction, requests more time, etc, the seller will be more prone to reject the original buyer's requests in favor of the back up buyer.

Stay in touch with the seller of the property. Know the original buyer's transaction dates. When is the original buyer to waive contingencies? A weekly call or email is in order to track the original transaction's progress.

SEARCHING for NEW #cre Business

How much of your day should be spent in pursuit of NEW commercial real estate business? I discuss this and much more in this week's VIDEO Tip

#CRE Improvements that SELL!

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The ways in which you improve your commercial real estate will depend upon the way in which your commercial real estate is occupied.

Owner occupant. If your business is housed in a building you own, you may be willing to invest in several new offices for the employees that you soon will hire.

Tenant. Paying someone else rent on a building your business occupies? You may be reluctant to upgrade the power service to run that new lathe.

Owner investor. Rely upon the rent paid by a tenant on a building you own? You will carefully analyze how much additional rent you can achieve if you add a truck loading door.

As an owner occupant or an owner investor, the money you spend improving your commercial real estate today will determine how marketable your building will be once vacant. Akin to that new kitchen you add to your residence, certain improvements will make your commercial real estate more desirable. Like that garage you convert into a bedroom, however, some improvements to your commercial real estate will actually detract from the appeal.

In that spirit, what improvements are worth the money?

Adding loading. Without a doubt, loading doors sell! If you can figure out a way to provide a mix of grade level drive-in doors with doors that are suited for a big rig trailer, you are golden. The more the merrier when it comes to loading doors.

Increasing the power. Upgrading the power feed into an industrial building is expensive. Costly ducting, trenching and transformers are needed. If your operation uses a lot of power and you invest in an upgrade, your building will be infinitely more appealing.

Providing a secured outside yard area. Occupants pay for interior square footage and generally not for outside space. Therefore, if you can secure some outside yard area for storage, staging or parking, you have expanded your square footage offering at no cost to the occupant. Yard space will cause your building to be leased or sold much quicker.

What improvements will cause your building to lose its attraction to potential occupants?

Too much office space. Especially if the office space is upstairs mezzanine space, most occupants will steer clear - because the space can't be easily modified or removed. You see, most industrial occupants are more interested in production space where they can make and ship things. Office space takes away from production space. If the excess office space is coupled with insufficient parking for the employees - death wish.

Special purpose fixtures. Freezers, coolers, lab space, cranes in the warehouse, warehouse racking, storage mezzanines, all fall into the category of special purpose fixtures. In most cases, occupants take these with them when they move. Encourage this! Rarely, will any value come from these improvements. The reason is simple - seldom are these fixtures used in the same way, therefore they are a nuisance.

Is the Commercial Real Estate Market Changing?

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A change is in the air. I can feel it. We have experienced a rather robust commercial real estate market since 2010 and a heated market since January of 2013.

But, my senses tell me that our market is changing. Why do I channel this premonition you may ask? I look at four metrics which I will discuss in detail, residential activity, inbound calls, buyer/tenant reaction, and lender behavior.

Spoiler alert. This is an unscientific opinion and not based upon any empirical data - just a guy, reading the tea leaves, that has seen his fair share of commercial real estate activity for the past four decades.

Residential activity. I bumped into a young residential friend of mine a few weeks ago and asked how things were going with his practice. We receive his monthly collateral and it would appear as though he is killing it. I expected to hear "things have never been better, we are sooo busy, etc.". What he said startled me - "we have a lack of entry level homes, affordability is at an all time low, there is no place for trade up buyers to move, banks are behaving conservatively (he actually said, getting a loan these days is a nightmare)". I marked the date carefully as my experience suggests we would encounter a similar slow down in six to nine months.

Inbound call activity. Signs, listings in the multiples, social media, newspaper columns, internet ads. All are meant to generate in bound call activity from potential occupants and cooperating brokers. The holidays are traditionally slow. But once the calendar dawns a new year and folks get back to work, the calls start with a vengeance. Not this year. This January was fraught with China's implosion, the stock market declines, Presidential primary season, and plunging commodity prices. Call volume this year has been tepid at best.

Buyer/tenant reaction. In a healthy market a buyer or tenant outlines their wish list - "find me a building with this amount of square footage, this percentage of office space in this location and I am a player." We then busy ourselves finding said building. Once found, the properly motivated occupant submits an offer and negotiations soon result in a new home for the business. Today, we see a lack of reaction even when the seemingly perfect opportunity arises. My suspicion is that something in the business owner's crystal ball causes concern. Possibly sales are flat, his industry is contracting, a piece of business he counted on cratered, he is uncomfortable with prices, or something unspoken. Regardless, this lack of reaction portends a changing market.

Lender behavior. In 2008, leading up to the great recession, we witnessed a change in the way banks underwrote loans. After the freewheeling years preceding 2008, we were spoiled. In prior years, a bank might look at a businesses customer that represented a big chunk of a businesses sales and assume it wasn't a deal killer if there were long term agreements in place with the customer. As 2008 progressed, banks became concerned with the businesses ability to repay if the customer was lost. Beginning in 2011, lenders loosened their restrictions Recently, we have noticed a shift back toward conservative underwriting. Now, as in 2008, lenders seem to look for reasons not to loan vs. reasons to loan.

But what about all of the contradicting data? Folks asked the same question at the beginning of 2008 as we sped toward the cliff ala Thelma and Louise. Am I predicting a catastrophic end to this year? No, but there are enough data points to cause a bit of concern and proceed cautiously through the next few months.

Is the #CRE market CHANGING?

We have all benefited from a very robust commercial real estate market. But, how can you know if your market is changing? I discuss this and more on this week's VIDEO Tip.

The TRUE Cost of Commercial Real Estate Ownership

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Owning the building in which you operate your manufacturing, distribution, or service business can offer huge benefits. You fix your "rent" for a long period of time, you capitalize on the appreciation of the building, certain tax benefits may apply, and if the ownership is structured correctly, you pay yourself each month rather than a landlord.

But before you rush out to buy an industrial building, I believe it is important to calculate the true cost of ownership.

Additionally, leasing a building might make more sense than buying a building if your company's growth plans will exceed the building's capacity in the next three to five years, if your company is consuming operating capital to fuel that growth, if the business has been unprofitable for two of the past three years, if you are planning to sell your business in the foreseeable future, or if the ownership of the company has multiple members or is publicly traded.

Once you have determined that buying is the way to go, what are the TRUE costs of ownership?

Financing costs. Unless your wealthy aunt Mabel left you a bundle, chances are you will finance the purchase of your commercial real estate. If you're curious about the various ways to finance your purchase, you can read about it here. Depending upon the amount of your down payment, you will be borrowing a chunk of your purchase price. This chunk will carry an interest rate and be paid back over a number of years. A part of your payment, monthly, will be interest and a part principal. The total payment is known as debt service. With today's super low interest rates, lock in for as long as you can. This will fix your servicing costs for years to come.

Property taxes and insurance. In addition to the debt service described above, you must add in the monthly costs of property taxes and insurance. In California, property taxes are approximately 1% of the assessed value. Property taxes are due twice a year in November and February. Most owners budget for this biannual expenditure by setting aside the monthly sum. Insurance on the property must also be paid. Generally, you pay for property insurance annually. But, akin to property taxes, most owners budget for this annual expense monthly.

Maintenance costs. Systems within the building must be maintained and replaced once they eclipse their useful life. Such systems include air conditioning , heating, warehouse sprinklers, power panels, plumbing, roof, etc. Typically, monthly, quarterly, or annual maintenance programs are employed but it is smart to build a reserve each month in the event one of the systems fails and must be replaced. Take a look at the condition of these systems when you buy the building. I recommend generating a report that budgets major expenditures over the first five years of ownership.

Return on your investment. The money you invest to purchase the building (down payment) should be added to other transaction costs such as lender points, appraisals, environmental reports, legal fees, and reserve accounts. All of these monies are your investment into the building. It is reasonable to expect a return on this investment, however meager. Keep in mind, if you are buying a building to house your business, you and your business have other uses for the capital - some uses will earn you and the business great returns.

Miscellaneous costs. Mowing the grass, trimming the trees, replacing broken sprinklers, mopping the floors, disposing of the trash, sweeping the parking lot, watering the landscape, etc. all are costs that you will incur - even if you have an employee accomplish the tasks. Account for the expense in your true cost.

The acid test. Once all of the costs are computed and totaled, compare your true cost of ownership to the lease rates for comparable buildings. If the cost of ownership exceeds the market lease rates by 20%, rethink your purchase. You might be better off leasing.

CRE Tech Intersect. A MUST Attend Event!

My #CRE Passion. TUESDAY Traffic Tips. I am passionate about commercial real estate technology and the myriad advances that have occurred in my years in the business. So what's next? If you are in or around the Los Angeles area, plan to attend CRE Tech Intersect. Link and information below.

http://cretechintersect.com/la2016/

Multiple OFFERS...Now What? 5 Ways to Handle

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As I have opined many times recently, Southern California commercial real estate is entrenched in an owner's market. Because almost 98 of every 100 industrial buildings are occupied, an imbalance exists. There are not enough quality buildings to fill the space demand from growing Orange County companies.

When a fairly priced building with the right amenities hits the market, multiple offers can ensue - in some cases prior to the multiple listing service publication.

As an owner's representative, multiple offers can present a conundrum - how to extract the best possible price for the commercial real estate while insuring that the transaction will close.

The downside of multiple offers is a bidding war.  A bidding war too often results in a buyer that will agree to anything, just to get the deal, and then renegotiate the points at the end of due diligence. Your seller is now compromised and may be forced to accept less vs. start over with a new buyer.

What follows are some suggestions that will help you choose the right buyer - best price and best potential to close at that price.

Assemble the due diligence information before taking the property to market. You don't want your buyer to know more about the building than you or the seller knows. In what condition is the roof? Are the air conditioners operational? Does the pavement need a slurry seal to remain impenetrable to water? Have any environmental studies been completed? What about the zoning? Are you familiar with the allowable uses within the zoning? Are building drawings available? Have any improvements been made that require permitting and are the permits available? Too often a building is brought to market with these and other questions a mystery. In my opinion, you should spend some time, assemble the documents a buyer will need, and provide these documents to the buyer. When you provide them is debatable. My rule is typically during the offer/counter offer stage so that the buyer(s) can take any issues into consideration when arriving at a price.

Make sure all of the buyers are operating with the same set of facts. One way to insure all of the buyers are operating with the same fact set is to attend all of the showings. During the building tours you can distribute marketing materials, confirm the pricing, discuss the seller's exit strategy, answer any of the buyer's questions - and maybe most importantly - get a gut feel for the buyer's motivation.

Be transparent when dealing with buyer's brokers. Your interaction with cooperating brokers should be transparent. Be forthright with information. Make yourself available to tour, answer questions, and provide the status of the sale. Certainly, you don't want to share confidential seller information, but you can represent the seller without doing so. You are open for business. Make sure you acknowledge this.

Create a spreadsheet with all of the offers and note the differences. If multiple offers arrive, I create a side by side look at all of the offers and chart things such as touring date, price, financing, due diligence period, closing time, initial deposit, increased deposit, buyer motivation, source of equity, current location and whether leased or owned; if leased, when is the expiration; if owned, will a sale of the existing building be necessary, nature of the use, etc. Sometimes there are too few differences in competing offers. In that case, you must rely on the tours, your interaction with the buyers, and a "gut feel" to form your recommendation.

Choose not one, but two buyers. When multiple offers occur, one buyer gets the nod and one or more do not. Akin to a game of musical chairs, several buyers will be odd man out. Some buyers, not chosen, will be angry. One way to offer a "consolation prize" is to choose a back up buyer. In addition to the second place trophy for buyer number two, your seller is able to keep buyer number one honest, focused, and behaving as a properly motivated buyer should. I encourage my sellers to commit to the second deal in writing so that buyer number two knows he will get the call if buyer number one blinks.