Friday, March 25, 2016

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.

Tuesday, March 22, 2016

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.

Friday, March 11, 2016

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.