Friday, February 26, 2016

It Takes a VILLAGE to Close a Commercial Real Estate Deal

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Someone politically famous once opined, "it takes a village...". Never has this been truer than describing the team it takes to close a commercial real estate transaction.

Certainly you need a ready willing and able property owner and a ready willing, able and properly motivated prospective occupant, but rarely do those two "dance" without a proper orchestra of professionals.

So let's take a look at the village band, shall we?

Owner and occupant brokers. When a commercial lease or sale transaction reaches a certain square footage or dollar amount, there are generally brokers on the owner and occupant side of the transaction. Candidly, I prefer this. If there is competent representation on the other side of the table, I believe the transaction proceeds more smoothly. Certainly, exceptions exist, but typically if a deal exceeds 10,000 square feet or $500,000 in consideration, over 80% of transactions have an owner rep and an occupant rep.

Escrow officer. If the deal is a sale, all of the documents, proceeds, recordables, and disclosures flow through a clearing house known as an escrow. Your officer is key. At a point in the transaction, you must step aside and let the escrow officer do her work. Rookies need not apply as this function is critical.

Title officer. Equally important in a sale to the escrow officer is the title officer because the title of the property must be insured. In order for title to be insured, a complete review of the title to the property must be conducted and a document known as a commitment to insure title produced. I love title representatives to death, but they are not title officers. Make sure that you are comfortable with the person that will be reviewing the commitment to insure and issuing the policy.

Lender. Unless your buyer is stroking a check for the full amount of the purchase, a lender will be involved. Whenever possible, I involve a mortgage broker. I believe the buyer gets a better deal and I really enjoy having someone involved that can "speak lender" in case there are issues. Some lenders operate on their own time frames which can wreak havoc on a time sensitive deal. A loan broker can keep the lender focused, hit the dates, and close on time.

City Expeditor. With all of the requirements cities place upon occupants these days, a professional that can deal with the city, understand the requirements for move-in, and advise your occupant is invaluable. Frankly, I don't leave home, or move an occupant without one.

Environmental Engineer. A must in a sale deal and I see more and more tenants requiring a review of the environmental history of the property. Generally, the lender will engage the enviro folks unless your buyer is paying all cash. I would still advise performing an inspection. That way, the buyer is protected against anything unforeseen.

Building inspector. There is a big difference between an inspector that is trying to be realistic in his findings vs. one that is trumping up issues to get hired to do the repair job. I like to use an inspector that is simply that, an inspector with no construction arm. Additionally, I use an inspector that can budget immediate repairs and those that aren't as urgent but necessary in the next five years.

Attorney. Brokers and attorneys have a healthy respect for one another. We each realize that the other is a necessary evil. I have found great benefit in involving an attorney early in a deal so that the proper entities are created, the necessary language is inserted in all contracts, and that title commitments are reviewed and approved.

Miscellaneous. Architects, contractors, material handling specialists (racking, forklifts, dock levelers), ADA specialists, space planners all can find their way onto the dance floor at some point in a transaction.

The ability to choose your orchestra members, especially ones with whom you've done business, can add years to your life, shave days from your deals, and produce music to which ALL can dance!

Friday, February 12, 2016

Be PATIENT with your Commercial Real Estate Deals

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Patient. A word that rarely describes a commercial real estate broker.

We are doers! Delays bug us. Bureaucracy drives us crazy. Please don't tell us "no that can't be done today".

I believe we lack patience because time is our most valuable commodity. After all, time and knowledge are all we have to sell.

However, a couple of recent transactions have forced me to wait. In both cases, we represented the owners of buildings in their pursuit of a tenant or a buyer. After an exhaustive search, I believe we will conclude both deals next week.

So, why will these deals conclude successfully? Patience! Curiously, we are entrenched in a market where owners have their pick of occupants - unless, there are issues with the building. If the building lacks amenities, is indebted with more than the building is worth, has an unrealistic owner, or a combination of the above - the marketing cycle is exponentially extended. We are forced to be patient. What follows are two stories of patience and the way it benefited both deals.

Case #1. We were engaged to sell a building one year ago Monday. I remember the date because we met with the owner on President's Day last year - a holiday for our office. Since we didn't have staff in the office, my associate and I had to scramble to attend the meeting with some semblance of a marketing package. We got the assignment and scurried back to the office to wordsmith an agreement - once again without staff. The owner is a delightful chap. His need to sell was not terribly delightful, however. A business mishap had forced the liquidation of his real estate. We struggled through environmental concerns, three failed escrows, many low ball offers, a building that was constructed in two phases and showed poorly, the building's lack of a couple of key features and a touring protocol that required discretion. We could not use the building's prominent location for marketing signage because the employees were un-aware of the building's disposition. Patience and determination prevailed as we secured a buyer that checked all the boxes for our seller - a good price, quick close, and a leaseback of some of the building.

Case #2. I wrote recently about the difficulty in leasing research and development buildings. You can read the post here if you wish. Typically, these buildings come equipped with too much office, too few parking spaces, and an industrial shop with inadequate power, loading, or warehouse clearance. If you combine these intrinsic difficulties with an occupant pool that is shrinking and an unrealistic owner, you have defined the situation contained in Case #2. We conducted over 40 tours in the past year and have generated fifteen offers - none seemed to gel. Last week an occupant divinely appeared, offered to lease the building with no tenant improvements, pay close to our asking rate, and move in immediately! Yes, miracles do happen. We are expecting to sign leases next week.

Friday, February 5, 2016

Should you "Stage" your Commercial Real Estate?

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One of my favorite television channels is HGTV. I love the Property Brothers, Love it or List it, Design on a Dime, and Flip or Flop.

Given my vocation, this is predictable as I do a similar thing for a living - although not residentially.

One thing universal in all of the HGTV offerings - the condition of a house during showing is critical. If the house shows poorly with outdated colors, visible repair needs, over sized furniture or evidence of residents - your purchase price will suffer as potential buyers will discount their offers to deal with the shortcomings.

OK, I get it! But, is there a parallel in commercial real estate?

My answer is a resounding YES! Staging your commercial real estate is not as easy as a few v-dinted pillows and strategically placed sofas, however. Staging commercial real estate involves the condition of the building and how it shows to prospective tenants and buyers.

If the condition of your commercial real estate is tantamount to achieving maximum value, what improvements should you consider before selling or leasing?

Leasing improvements: If your goal is to lease your commercial real estate quickly and for an above market lease rate, you must invest some dollars placing the property in "rent ready" condition. The carpeting in the office should be replaced or at a minimum removed so that a prospective tenant knows that new flooring is in the plans. A fresh coat of paint throughout the office and warehouse brightens things and adds an air of new. All of the systems - plumbing, heating, ventilating, air conditioning, roof, sprinkler system, loading doors, electrical panels, fire alarm system should be checked and certified. The outside of the building is important as well. Remember, if your commercial real estate lacks curb appeal, the tour might hop-scotch your building for one that looks good. Paving, landscaping, and truck loading areas should be shored up and maintained during the vacancy. Most potential tenants have a limited imagination or patience for the way "things could be". Therefore, delaying the above could cause an occupant to bypass your building for another that is move-in ready.

Sale improvements: If your goal is to sell your commercial real estate for top dollar, you want to plan your refurbishment wisely. If you cannot justify a 100% return or greater - question the investment. Said simply, if you repaint the building at a cost of $20,000, that investment should translate into a $20,000 increase in value. In my experience, the items in a building purchase that give buyers the greatest heartburn are the condition of the roof and air conditioning. I generally advise my clients to perform an inspection of these systems. We then know if any issues exist and can plan accordingly.

Biggest mistake: Some owners will adopt the attitude of "waiting until the occupant appears before investing in any building refurbishment." Certainly, there are reasons for this position - no available funds for investment is the most common - but the downside is steep. If a prospective occupant perceives the owner is not "open for business", he will scatter like ashes in a Santa Ana wind.

Showing condition: If the property is vacant during showings - and your broker is not present during showings - complete literature should be available to prospective occupants.