Friday, December 29, 2017

A Commercial Real Estate Buyer Doesn't Care!

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Akin to an automobile with a DVD player - a commercial building with certain features may NOT appeal to a buyer.

In fact they don't care, won't pay for the renovation - and maybe worse - will exclude your building from consideration if the betterment exists.

Hmmm, weird you say. I spent a lot of money installing those solar panels in my parking lot. Who cares if the equipment consumes ten spaces - my employees carpool or uber to work. Congratulations! You invested in an upgrade that made your building less desirable - even though you believed the value was enhanced.

So, with that preamble - what other improvements do buyers shun and to which sellers cling - with the expectation of a higher price?

Freeway frontage. Not an improvement per se, but an attribute with which many owners ascribe value. Unless your buyer wants looks from 225,000 cars per day, he will be unwilling to pay. In some cases, freeway visibility is a negative because of noise, debris, and transients that loiter. An exception to this rule is the retailer whose business can benefit from the exposure. Most others don't care.

Signalized corner. Similar to freeway visibility, a signalized corner causes traffic to pause in front of your location - which means your building is on a busy street. Great! but if your business isn't dependent upon destination customers, you just as soon they whisk by. An exception - which could bolster worth - is a property with a higher and better use - i.e. a residential conversion in the future. Now, the signalized intersection creates some benefit and can generate more dollars.

Amount of office space within an industrial building. The amount of office space within a building - especially an industrial building where companies make and ship things - is the biggest merit disconnect between a seller and a buyer. Adding office space to an industrial building is a costly adventure - permitting, construction, timing, new office furniture, etc. - in some cases $75-$100 per square foot. When a seller shells out that amount of money, he expects a return. Unfortunately, rarely does the next guy see any benefit. The layout is wrong, the finishes are outdated, too much shop space is consumed, a second story was created with no elevator, and so on. If a buyer doesn't need the excess office space, he must pay to have it removed or move on to the next building without the problem. Certainly the exception is the black swan that can walk in and use everything without any changes - he will see the benefits and gladly pay.

Assumable financing. Money is cheap and plentiful these days. Lenders are begging qualified folks to borrow. In many cases, a buyer can finance 90% of the purchase at interest rates in the fours. Enter assumable debt. Chances are the assumable debt was written at interest rates higher than present and for less than 90% of the sale price. Thus, a buyer is better served getting a new loan. An exception would be an owner carried loan - especially if the buyer can avoid the costs of an appraisal and loan origination.

Monday, December 25, 2017

Commercial Real Estate Christmas Gifts - Disguised as Lumps of Coal

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Merry Christmas, dear readers! My wish for you this season is joy and happiness and HUGE profits for your commercial real.

As most of you are reading this on Christmas Eve, I thought it would be fun to recap a few "gifts" I received this year - albeit most initially were lumps of coal. Have you ever received such a gift - disguised as a problem? If so, you will thoroughly enjoy this column.

Will the REAL seller please stand up. Early this year we received a call from a dear friend and client. He owned and had occupied his building since the fifties! The use to which the building had be subjected was environmentally questionable, antiquated was kind when describing the construction, and unrealistic summarized his price expectations. BOOM! Three full price offers in the first week of marketing. Just choose the right buyer of the three and clear sailing to close. Except the ownership entity was inactive - ooops! Several weeks, thousands of dollars in past due Franchise Tax Board payments later, we resolved the issue and closed.

Going once, twice - SOLD! We completed our first property auction this week with the good folks at Ten-X. I was quite skeptical the process would render any buyers we hadn't uncovered. Boy was I mistaken! Bidding for the last five minutes was furious - akin to your Grandma angling for a pair of hand-made mittens on E-Bay. Exceeded was the reserve amount by 5%. I'm a believer!

The Smorgasbord of issues. We can generally count on an at least one show-stopping issue in a deal - appraisal below contract price, enviro concerns, a nasty seller or buyer, an unconventional use, a city out for blood. Like dropping the proverbial other shoe, if the issue doesn't surface early, we start to sweat - knowing it's coming. Rarely, however, is there more than one "challenge". Corrected is how I stand! We just closed a deal with not one, two, three, four, five, or six, seven - but EIGHT walk away issues in ONE deal! Where is the octopus missing a shoe?

Just kidding, I DON'T want to sell. This has happened to me once in thirty three years! 2017 was the year. Received a call from my seller. He didn't want to close. Our buyer was contingency free at this point and had spent a fair amount of time and money becoming so. Fortunately, the buyer was cool and agreed to allow our seller to cancel in return for a small reimbursement of their due diligence costs. Whew! Please don't try this at home.

New Beginnings. Sadly, businesses fail - some after decades. We benefit because a vacant building must be filled. It's refreshing when the building provides a home for a new budding enterprise which employs dozens and generates revenue for the city in which it's located.

So, on Dasher, on Dancer - Can't wait to see what gifts 2018 proffers.

Friday, December 22, 2017

Is Market Expertise Overrated?

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The question I will consider today originated with a call I recently received. Turns out, the caller was an avid reader of this periodical and this author specifically. Leasing assistance was needed. However, they own a building which is outside my geographical and specialty expertise. But, I took the meeting - with the thought if I wasn't the right guy, I could help connect them to someone who was.

Commercial Real Estate is very diverse. Office space - high rise, mid rise, garden style, medical, government, religious, vocational. Industrial - manufacturing, flex, warehouse distribution, service, truck terminals. Retail - oh my word, the types are endless - regional malls, power centers, restaurants, neighborhood shopping centers, strip centers. Multi family - AKA four plus unit residential. Investments, Hospitality, and Land. And, within each product segment of commercial real estate, there are specialty categories such as industrial manufacturing - aerospace, plastic injection molding, assembly, electronics, food, etc.

In short, it is impossible to know every commercial real estate genre. Akin to a physician, we specialize - typically by a type - industrial, office, or retail, a size range - i.e. 10,000-50,000 square feet, and or a geographical area - example: North Orange County. Intimate knowledge of a thin slice - hyper local - creates a market expertise.

So, when considering engaging a commercial real estate professional - is market expertise critical? by that I mean, is it necessary for your agent to know every deal, every owner, every building, and all of the active agents in the area surrounding your location? Certainly, it helps - but I don't believe it is critical. In some cases, it jades your professional. Viewed is too small a prism for the possibilities your property can endear.

In my mind, the critical components of any advisory relationship are the trust your agent engenders, the candor and transparency with which he deals, the understanding of your requirement and the sincerity of his approach. With these qualities - and the use of technology - your agent can quickly get up to speed on the competition and market conditions. By the way, you'll understand his sincerity when he explains - this isn't my area of expertise.

Friday, December 15, 2017

5 Considerations When Leasing Commercial Real Estate

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I recently authored a post entitled Gotcha Clauses in a Commercial Lease. Wherein, I discussed those nasty sentences in that twelve page tome you were asked to sign - watch out! Today, I'll take a step back and discuss the factors you should consider BEFORE you are ready to ink that commercial real estate lease.

The location. Raise your hand if you have never heard the three most important factors in real estate - location, location, location! Right? But why? Here is why - in no particular order. Your customers may need to find you. May, because some business have zero walk-in or destination customers - others rely upon foot traffic. Access to qualified employees is important for the health of your business. Trucks must deliver your raw materials and transport your finished goods. Employee retention is critical - if you locate out of state, how many will follow? Proximity to your suppliers can save you money. Where do you live? After all, you are the boss. So, location does matter!

The term of the lease. Two common errors I see occupants make are committing to a long term lease when times are frothy or a short term lease when the market is crippled. Business activity fuels a business owner's sense of well being - business is great so I will commit to a ten year lease. Little thought is given to where we are in the cycle, that lease rates are at their all time high, and you would be better served with a five year lease with a five year option. The opposite is true when business bosses are uncertain. Even though landlords are handing out goodies - many opt for a shorter term commitment - three years or fewer.

The leasing entity. Any owner of commercial real estate will require tax returns and financial statements from the corporation, individuals, LLC, or partnership signing the lease. Great! Got those. However, I suggest being preemptive by having your formation documents, information on your previous landlord, bank statements, and history of your company at the ready. Also, give some thought to the reason for the move and why you chose this location. I've witnessed this "story" as the determinant for a tenancy.

The type of owner. A pension fund advisor from New York will view your tenancy differently than a private investor who owns two buildings in Anaheim - and not always more discerning. Speaking "owner" will cause the lease negotiation to proceed swimmingly.

The vibe. How quickly did you receive a response to your lease offer? What additional information were you required to provide from your initial offering package? What do other tenants in the building have to say about the owner - yes! you should talk to a few of them. The answers to these questions will provide a glimpse of your future as a tenant.

Friday, December 8, 2017

The MOST Important Part of a Commercial Real Estate Investment

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Many of you reading at home own a business.

Your business address - if it's not your spare bedroom or a corner of your garage is found at a manufacturing building, a suite of offices, or a retail storefront.

You either lease or own your location.

If you lease the commercial real estate you occupy, you have a landlord.

Said landlord - the commercial real estate investor - is the subject of today's post.

Landlords come in all shapes and sizes. Some own very few buildings and have invested their own savings in a commercial real estate investment. While others are funded by Wall Street or a pension fund and are extremely bureaucratic.

Regardless of a landlord's holdings, their source of funding, or sophistication - the one thing they share is their reliance upon a property's net income. The income stream - rent less operating expenses, or net income - provides their return on investment.

I believe the income stream is the MOST important part of a commercial real estate investment - otherwise, you don't have an investment - you own an empty building.

A commercial real estate investor - AKA a landlord - considers many aspects of his investment.

The stability of the income stream. Is rent paid by several tenants or one? If an investor owns a 10,000 square foot building with ten tenants and one tenant moves out - nine other rent paying tenants remain. Manageable. Conversely, if the 10,000 square foot space has one occupant - the income is dependent upon the health of that tenant. If business ebbs, a costly vacancy may occur. Also, when does the lease(s) expire? A short term lease - less than three years - creates a potential transition much quicker than a ten year lease.

Is the income stream above or below the current market. Rents have sky rocketed within the last few months. If a lease was signed two years ago, chances are the rent may be below the market rents today. This is good news if the buildings goes dark and you must replace the tenancy - you'll get more rent. However, if we experience a dip, you may find yourself owning a building with an unsustainable rent - quite costly if your tenant vacates.

What sort of return does the income stream provide. Generally, the net income - rent less expenses - provides a nice return on the money invested - typically 4-6%. A simple example. Net income is $10,000 per month - $120,000 per year. If this $120,000 per year provides a 5% return - the building is worth $2,400,000. Your return may be drastically different. Let's say you bought the building ten years ago and paid $1,500,000. The same $120,000 in annual net rents yield you an 8% return.

Friday, December 1, 2017

Are you a Commercial Real Estate Dreamer or a Seller?

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One of the nasty by products of a seller's market is an un-realistic seller - one who is motivated by the price he will accept vs. the best price his property will fetch.

Also known as dreamers, this brand of seller approaches the market in this fashion - "well, I understand my building has issues, but I still want more than it is worth."

We as commercial real estate professionals are then confronted with a dilemma; do I accept the assignment to sell the building - albeit at an inflated number with all of its fuzz - and hope the market will persuade him to be realistic? Or, do I turn down the listing and hope I'm contacted if the first guy fails?

Because available buildings are so scarce these days, too many of us take the assignment, let the market activity be the bad guy, and pray for divine providence.

So, to all you sellers of commercial real estate out there, before you send your broker into the market without a story - the reason for the price, the upside potential, a solution for the challenges - something, please consider the following:

Your broker is not a magician. Unless your representative is named Houdini, chances are he cannot remove a mystical rabbit from his hat - AKA find you the needle in the proverbial haystack. Buyers these days are savvy. They are successful business owners or investors who understand risk. Generally, buyers are willing to be flexible and work around problems - but not if the other side is un-realistic in its expectations.

The valuation your broker gave you is accurate. Brokers are paid to close deals at the highest possible price in the shortest amount of time. Period. Why would we tell you your building is worth half what you believe?

Your broker has considered the challenges. Countless are the number of buyer tours we conduct and amount of feedback we filter. When you contend "I know my roof needs replacement but I'm not willing to bend on my price" - we've heard the buyer's comments. "Well, if the seller is unwilling to fix the roof or reduce the price, who is supposed to pay for that?" Listen to your professional. He is telling you the truth.

Credibility is at stake - yours and the brokers. When a building hits the market fraught with issues, the market place reacts in one of two ways - wow! The seller must be smokin' the good stuff or the broker must have puffed the price to convince the seller to list with him. Either way is a loser. Typically, the universe of potential buyers simply ignores the new offering as unrealistic and unworthy of a second look.

Friday, November 24, 2017

Five Unintended Consequences of a Commercial Real Estate Move

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As you pull into your business home, you realize all of the parking spaces are consumed - and you're forced to park in the adjacent lot.

When you enter the front door, you are greeted by several employees who co-habitate because your office space is insufficient for the body count of your company.

A quick foray into the warehouse convinces you the new shipment of raw materials will have to wait - you simply have no place to store them.

All the above are consequences of occupying a space which is too small for your operation. OK. You've made a decision to relocate. So, let's discuss some of the unintended consequences of a commercial real estate move.

The move costs way more than you budgeted. Suddenly, the old office furniture looks tired and dated and you decide to replace it. Your new business city of residence requires a UL rating be updated for ALL of your machinery. If you'd stayed put, this cost would have been avoided. Simply moving your warehouse racking from the old place to the new place now requires a seismic test, a high pile storage permit, and a racking permit. That electrical service you believed was sufficient will now require a costly upgrade to efficiently power your presses.

You lose key employees. Unemployment in Orange County is at a very low percentage currently. Consequently, good employees are in very high demand. A simple relocation - which may add a few minutes of commute time - could cause a key employee to test the market with another employer.

Suppliers are less accessible. Ready access to your material suppliers is huge. If your move creates more lead time for your suppliers or costlier shipping - an unintended consequence occurs - your products become more expensive to produce.

Customers can't find you. Especially true in the retail arena - you build customer loyalty over time - with a location that is easy to find. A move - even a few blocks away - will cause some customers to take their shopping spree on line and avoid the traffic.

Disruption is enormous. If your employees catch wind you are considering move - the buzz around the shop becomes akin to an episode of The Office - no one gets anything done while anticipating the new location. Some companies are fortunate. The move is planned and executed with the precision of a Seal Team 6 mission - business closes in the old location on Friday at 5:00 PM and re-opens without a hitch in the new location at 8:00 AM on Monday. Reality would suggest the opposite is true - computer cabling is lost, the wrong carpet is installed, your internet service provider thought the move was next week, SCE is tardy delivering the new power panel, your customer service line isn't forwarded, etc.

All of a sudden, parking in the adjacent lot doesn't seem so bad.

Friday, November 17, 2017

ADVICE for this CRAZY Commercial Real Estate Market

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This commercial real estate market reminds me of an opened bag of potato chips - with 98.5% of them eaten. The full chips are consumed - functional buildings, with good owner motivation, priced aggressively but still within reason.

What remains are the remnants of the whole crunch - dysfunctional, over priced locations with zero owner motivation to meet the market and make a deal! A normal ebb and flow of availabilities and interested buyers has been usurped with feeding frenzies and bidding wars.

Sellers are enjoying these times. Many of us are warning a correction is near - but we also struggle to pinpoint the trigger. So we continue to call owners of occupied buildings to see if they will sell, monitor the LoopNet, Costar, and Commercial Seach alerts - and hope for a new vacancy.

With this as a backdrop, what advice would I give an occupant looking for space or an owner considering his future?

Plan early. One year may not be enough time - especially if some complexity exists with your requirement. Please don't believe you'll waltz out into the market and lease or buy the first thing you see. You won't have many choices. Time will be needed for additional spaces to make themselves available.

Consider ALL of your alternatives. We met with a company today. Their lease expires the end of this year. An ownership change has caused a re-evaluation of their space. Moving is the direction they are pursuing. Hold on! Let's keep the existing location in play - just in case. When we surveyed the market, we discovered ONE space that meets their needs. All of a sudden, their current home looks better. Recently, we scoured the Santa Ana area for a client. Industrial is their use - trucks, building materials, minimal office. With Santa Ana as ground zero, we are now considering a retail building - because it's located in the right area and is the correct size.

Don't assume next year will be the same. Remember that call you received from a broker claiming to have a buyer interested in your building? You blew him off but he was persistent. A multitude of calls morphed into a tour and subsequently an unsolicited offer. The price caused you to double take. Well, if he's willing to pay this today, what will the building be worth next year? You don't want to be that guy at the cocktail party talking about the deal you should've done.

If a deal seems obscene - it is. Last week we toured a project which is light years from the freeway. Mismanaged was the theme - low rents, high expenses, ownership squabble, vacant space, SKY HIGH asking price. Yep, you guessed it. Three full asking price offers. My buyer and I shook our heads in disbelief and consoled each other - the deal wasn't for us!

Friday, November 10, 2017

LEASING Commercial Real Estate - In the FUTURE

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Recently, we received a call from a dear client - they're all dear by the way. When we constructed his lease seven years ago, absent were any extension rights - not for lack of trying - because the owner was unwilling to grant any extension rights.

When we viewed the deal in its totality, the lack of extension rights were out manned by the other good things the deal had to offer - rate, term, tenant improvements, abated rent, etc. So we proceeded.

Then, WHAM! The owner decided to sell the building to a company that gave our clients the heave ho - and we were looking for another location.

By definition, an extension occurs at the expiration of your commercial real estate lease - but is agreed upon when you sign your lease. So, you are truly leasing commercial real estate - in the future. Unlike a residential lease, you, as the occupant, are not guaranteed you can stay past the lease expiration. There are nasty little creatures called "holdover provisions" which allow an owner to jack your rent way up if you stay - or worse - cause you to move. With this experience as a back drop, and guided by the definition, today, I will discuss the various extension rights you should consider when negotiating a commercial real estate lease.

An option to renew or extend. You, as the occupant, are allowed to stay in the building after the conclusion of your lease at a pre-determined set of deal points - such as the rent you will pay and the increases in your rent on an annual basis. Typically, in a down market, owners will be willing to grant an option to extend at fixed rent amount. When markets are more robust - like today - the extension will be based upon prevailing market forces in the future. In essence, you will have an agreement to agree - the owner won't give you the boot but also won't commit to a rent figure. Generally, options to renew will carry certain rules of engagement such as the time window under which you can exercise the option, the method by which you give the owner notice, and exactly who must exercise the option. Also, you must have faithfully paid your rent on time or the option to extend may be at risk. If any of these boxes go unchecked, your option could be lost - so pay attention!

A right of first refusal to lease. Simply, if you have no option to extend, a right of first refusal allows you to match or exceed another occupant's offer to lease the building. Rights of first refusal to lease occur most often with adjacent or expansion space and are rare as a means to renew a lease. We commonly see rights of first refusals to purchase.

A right of first offer to lease. The owner comes to you and says "I'm willing to allow you to stay past the expiration of your lease. Make me an offer." Akin to a right of first refusal, these generally are a purchase right vs a lease extension right - but we occasionally see them with leases.

Friday, November 3, 2017

3 Commercial Real Estate Deal Gimmicks - Be Aware!

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Our commercial real estate market has progressed to the point of absurdity - in many instances.

Six full priced offers on a new listing whose ask eclipses the recent comps by 15%.

Or, sellers who are "dug-in" and not willing to listen to reason and therefore unwilling to budge on their expectations.

Finally, an occasional tear in the fabric which defies logic - a well located, improperly exposed building sells for 20% less than it is worth because the seller experienced a transition and couldn't wait upon a normal marketing process to unfold.

During these times we encounter some "gimmicks" which this column is meant to diffuse and provide warning to unwary buyers.

I'll just guarantee the rents. Occasionally we encounter a building with remnants of the last downturn - the occupants signed up during the downturn and consequently are paying a rent less than the current market will bear. As we discussed, the economic value of an income property is dependent upon the rent the occupants pay. More rent more value. Enter rent guarantees. The owner - hopeful to get maximum value -  will supplement the difference between market and the amount his tenants pay. Good in theory. Bad in practice. Any savvy investor will ask - what happens when the guarantee ends? Now I am stuck with an under market rent on a building for which I overpaid.

Below market asking price. This suggests one of two scenarios. Either the building has a latent issue - partnership squabble, non pre-payable loan, environmental contamination, long term lease at an under market rent, imminent city action for re-development, or the like. Or, the listing broker has priced the building this way in order to attract multiple offers, create a bidding war and generate activity above the market rate. If you are a buyer caught in this vortex, the pain never stops until someone says uncle!

A seller lease back. As we mentioned in previous columns, be wary of a seller leaseback - the rent he is willing to pay, his financial capabilities, and his motivation - especially if you are relying on his rent as a justification to buy at his value. Conversely, if the seller requires a lease back after you own the building to accommodate his move out schedule, make sure he has a place to go. In our market of skinny vacancy - a replacement may not be easy to locate.

Friday, October 27, 2017

4 Random Commercial Real Estate Leasing Thoughts

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Today, I decided it would be fun to regurgitate a few random thoughts as they pertain to LEASING commercial real estate.

As we have discussed before, leasing is a big part of our daily activity - unlike our residential counterparts. We, as commercial real estate professionals help occupants find space to lease or buy.

Typically, leases account for 70-75% of our deal volume - sales the balance.

We differ from our residential counterparts. Our fees are based on a percentage of the deal's total consideration - purchase price or the amount of rent paid over the term of the lease. Generally, commercial leases run 3-10 years - so the amount of rent payments negotiated is a significant sum. Whereas, residential leases are month-to-month or a year maximum. Consequently, the potential fees on a residential lease - because the term is much shorter - make it unprofitable for residential agents to pursue.

Subleases are a pain. A sublease is necessary when an occupant no longer needs the building - for myriad reasons - yet has a term of lease remaining. The owner of the building still wants his rent. So, the occupant resorts to finding a substitute - a subtenant - to move in and assume the rent payments. Differences in uses, credit, number of players, and changing market conditions all create the pain in a sublease transaction.

Credit requirements of a property owner. At a minimum, the owner will look at the total amount of the lease - let's assume $10,000 per month for sixty months or $600,000. The owner is leasing an occupant the building in return for $600,000 in rent payments. Therefore, the owner is extending the occupant $600,000 of credit - so to speak. Carefully scrutinized is the occupant's ability to repay the $600,000 - through an analysis of the business's sales and credit history.

Process. Searching for a space to lease is similar to searching for a building to buy. The similarities: Facility requirements are discussed - loading, power, amount of office space, warehouse ceiling height, etc., geographical areas are considered, a list of alternatives is toured and a candidate is chosen. Now, the differences occur. A sale deal will proceed to a negotiation, an agreement, an escrow, due diligence and closing - approximately 60-90 days. But, a lease will involve a negotiation and a lease - much quicker - fewer than 30 days, in most cases.

If ever we can assist you in leasing or buying a building, please call us at 714.564.7104 or email us at

Friday, October 20, 2017

Commercial Real Estate Sale Leasebacks - the DOWNSIDE

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I've advised a number of my clients recently to consider selling their commercial real estate and striking a three to ten year lease with the investor that buys it. A few have listened.

This structure, in our parlance, is known as a sale leaseback. Different than a straight lease and not a short term lease that accommodates a purchase, a sale leaseback allows an owner occupant the chance to sell at today's high prices and remain in the building - albeit as a tenant - and avoid a move.

It's a slick arrangement when the correct motivations are involved. I wrote about those reasons in a past post. You can read about it here. 

Today, I want to spend a moment and discuss the downside of a sale leaseback.

The message it sends to the market. When a sale leaseback is listed and marketed for sale, the questions from buyers range from - "why is he selling?" to "is his company leaking at the gills and needs cash to survive? Generally, there is a story. Its critical to understand the story, why a seller is selling, and how the current financials present.

I will just pay more rent. Value is determined by taking the rent your company is willing to pay and packaging the rent as a return on investment. Simply, if your company can afford to pay $10,000 per month or $120,000 per year and the return is 5% - your building is worth $2,400,000. Easy, yes? Now the fun begins. Where is $10,000 per month in relation to what other comparable buildings achieve in rent? It's either above, below, or at par. Par or below - you're golden. Above and you're scrambling. You see, an investor looks at the worse case scenario - you spit the hook after a year, can't pay the rent - or worse file bankruptcy - and he's stuck with a building he can't rent for the same amount you were paying.

You strap your operating company. If you own your building and times get tough, you can adjust the rent your company pays you - after all, you are the owner AND the tenant. Once you inject an arm's length investor into the mix - that flexibility evaporates. You are now bound to a lease. If you don't pay, you may get evicted.

There are tax consequences. As we've discussed, selling appreciated commercial real estate comes with a heavy tax consequence - unless you employ a tax deferred exchange. Yes, you free your equity, but at a significant cost - in some cases up to 35%.

Friday, October 13, 2017

REASONS Your Commercial Real Estate ISN'T Selling

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I've opined for months that Southern California is immersed in a seller's market - there are many more buyers in the market than sellers - advantage sellers!

Today, however, I want to discuss WHY your commercial real estate isn't selling.

After all, with more buyers around than sellers, you should be flush with offers  - folks clamoring to buy your building - but nothing - crickets! So what's up?

Below, are my reasons why your building isn't in the sold category.

Your building is over priced. As we've discussed, asking prices are tricky. Hopefully you've looked at recently closed sales, compared those to what is currently available, checked the trends - up or down trending, and finally placed your building under careful scrutiny to determine its value. Great. You've established an asking price. However, if the asking price has no basis in fact - comps or avails to support it - your building will sit. Oh, you'll get tons of inquiries - there are not a lot of available buildings - but no one will want to tour. Or worse, offer on your commercial real estate.

Your building lacks a key amenity. If you own a space with challenged loading, a logistics building with low ceilings, a manufacturing location with insufficient power, a service depot without an outside storage area for trucks - congratulations! Your building lacks a key amenity. Some of these issues can be solved with dollars - others cannot.

You are un-realistic in your expectations. If you have received a number of showings - with no offers - chances are there is a problem. You are likely overpriced or your building lacks a key amenity. With this market intel, if you continue to believe your kitty is the cutest in the contest and refuse to consider others may be cuter - your expectations are out of whack with the market.

There are use restrictions. We toured a building recently with a prospective buyer. Our guy liked the possibilities because there was a large outside staging and storage area - a key requirement of his occupancy. As we were completing our pre-proposal research, we discovered the area in question was unusable for the purposes our client intended. Furthermore, there was a giant easement running through the middle of the yard. Ooops. No deal here.

Your representative is un-cooperative. I'm honored to work in an industry with so many highly skilled professionals. However, on occasion we encounter a rogue element who sees the real estate brokerage business as a way to pad his bank account vs working in the best interest of his seller. If your activity is waning - it could be your representative is not doing what's necessary to ply nicely with others.

Friday, October 6, 2017

The Downside of a FAST Growing company - Where would Amazon go?

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The genesis of this post came from two sources. First, a very well written article in the New York Times entitled: Amazon Plans Second Headquarters, Opening a Bidding War Among Cities. Secondly, from my Orange County Register editor who posed the question, "where would Amazon locate if they chose Orange County?"

Clearly, Amazon's footprint in the Seattle area is massive - around 80,000 folks draw a paycheck and consumed is about 20% of the available prime office space in the city - roughly equivalent to 8,000,000 square feet of space! Imagine the chaos created if Amazon were to vacate even half of that occupied space - incredible.

For the HQ2, Amazon's plan would include 50,000 new hires and a facility to house them. Close to an international airport, skilled labor, affordable housing, access to mass transit, fiber optic capabilities, and a business friendly environment are all on Amazon's checklist - with all the appurtenant goodies states like Texas seem willing to dole out - tax breaks, free land, employee relocation expenses, no state income taxes, cameo with the governor, etc. 

Although many of the checklist items can be found in the OC - labor, airport, fiber - California has shunned economic incentives with the abolition of redevelopment districts and enterprise zones. Gone are the halcyon days of California cities writing a check for the promise of future sales tax and incremental property tax revenue increases - the proverbial "I scratch your back" scenario. 

So, where would Amazon go in the highly unlikely event the OC was in the running? Well, it depends. On what, you ask? On the type of facility they are seeking. It appears the new headquarters would house a number of engineers and skilled labor - therefore a facility much like Broadcom abandoned when they were recently acquired. 50,000 employees at 100 square feet each would require around 5,000,000 square feet of office or flex industrial space - like those that litter the Irvine Spectrum. A quick search yielded approximately zero existing - occupied or vacant - buildings that could garner that amount of footage in the county. Therefore, someone would have to build the building for Amazon to occupy. If we stacked the building with two stories, this new construction would require close to 100 buildable acres - roughly the size of the old Boeing campus in Anaheim, an eighth of the Great Park or around half the size of Angel Stadium - parking and field. Probably ain't happening. 

Lets go a different route. Amazon has constructed 77 warehouse buildings around the nation since 2005. A number of others were either planned or under construction and Amazon became the occupant. Generally, the buildings are 750,000-1,000,000 square feet apiece. To put that figure in context, we are describing 25 football fields - under one roof - plus, the appurtenant parking and circulation around the building - or another 10-25 football fields. The only vacant building in Orange County that could house an operation such as that would be the former JC Penneys building in Buena Park. But, there is an issue - the ceilings are too low for Amazon's proprietary procurement system. Ooops!

Have fun in Dallas, Amazon. Go Cowboys!

Friday, September 29, 2017

The DOWNSIDE of an Up Commercial Real Estate Market

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Someone wise once opined, it's a great time to sell commercial real estate - but not a great time to buy commercial real estate. A market needs an ample supply of buyers, sellers, and lenders - all operating independently yet in concert to function properly. If an imbalance exists - too few sellers for the buyers in the market or a shortage of free flowing capital - the picture is shaded in favor of the scarce. Currently, our industrial market is up trending - great for sellers, tough for buyers. Below are a few of the downsides of an up market.

Available buildings are in short supply. Vacancy on industrial buildings is the lowest its been since - well ever! We state our vacancy as 2% - 2 of every 100 buildings are available. However, if we dissect this figure, we discover that the true vacancy - buildings without an occupant - is closer to 1/2%. You see, if a building is marketed for sale or lease while still occupied, it is counted as available. If the availability is dependent upon the occupant finding new quarters - good luck - it may not ever be vacant.

Sellers are over zealous. It seems that every deal sets a new record and is completed at a price higher than the previous deal. This robust activity causes sellers to be quite bullish. Recently, I submitted an offer to a seller whose property is not on the market. He has indicated, however, that for the right price, he would sell. Our offer contained the "right price" but now the seller believes values have eclipsed his right price and he has a new right price. Upward we go.

Normal negotiations are impossible. Because available buildings are in short supply and sellers are over zealous - conducting a traditional give and take dialogue is difficult - close to impossible. Unless a buyer is willing to step up and accept the offering per the seller's terms and conditions, another buyer comes along who will. I've witnessed several instances recently where buyers miss out and are forced to conduct another search for their new business home.

Establishing values is tricky. As commercial real estate professionals, we are tasked with recommending values to sellers based upon recently completed transactions and currently available buildings. In an up market, a wide gap exists between the recent deals and the ones available for sale. The intangible - which makes establishing values tricky - is how close to the gap the next round of closed deals will be. Also, appraisers go nuts. Buyers and sellers agree to a price that cannot be justified by closed sales. An appraiser must then interpolate a value using a secret matrix of appraiser magic.

Lenders are a bit goosey. Commercial real estate lenders sense our values are near the top. A loan misstep could cause an uneasy time if prices adjust downward and the amount owed exceeds the market value. Currently, foreclosure activity is practically non-existent - but the skeletons of 2009-2011 still haunt many lenders. Proceed with caution appears to be the credo of many who loan money on commercial real estate.

Friday, September 22, 2017

Summer's OVER. Commercial Real Estate Considerations

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Summer's over although the heat didn't get the memo. Kids are back to school. Disneyland is navigable again, The Orange Street Fair is distant memory, and folks are back to work with an eye toward wrapping up their commercial real estate requirements before the holidays - which will be here before you know it. If you venture into some stores - you might believe the holidays are next week!

So, what commercial real estate considerations should you make with four months left in 2017?

Plan for 2018. If you have a landlord - and don't own your location, chances are your owner is busy calculating the operating expenses on your building. After all, in January of next year you will receive a bill for the projected property taxes, property insurance, and common area maintenance charges for 2018. Generally, owners break these into monthly payments and reconcile the over or under payments the following year. This time a year is also a good period to reflect on your business for next year and your potential space needs. If you anticipate any major changes in the square footage you occupy, use this time of year to anticipate and react.

Parking lot, cooling and heating, roof. As mentioned in a previous column, now is a wonderful time to have that roof checked before the rains of winter come deluging down. You should have a really good idea how your cooling is working - as its worked overtime in August - but what about the heating? Fire it up and correct any problems. Many owners deal with parking lot issues - such as spalling, pot holes, and re surfacing in early fall. The rains are a couple of months away and these hot dry conditions are ideal for parking lot repairs.

You've still time to make a deal. We've four months left until we chorus auld lang syne. Plenty of time to search, negotiate, and sign a lease. If you're direction leans more toward owning, plan to be in escrow in two weeks - otherwise, I'm afraid the buzzer may sound before you close.

Great time of year for marketing. Contrary to our residential counterparts who experience their busiest in the spring and summer, our busy season starts now! So, if you are a seller, put that building up for sale and take advantage of the year end activity.

SBA runs out of money - theoretically. Another reason to secure that deal now - the Small Business Association gets a new burst of funds to loan every October. If we have any government shut downs or budget shenanigans, and your loan is not in the approval queue, an SBA loan can get delayed. If your loan isn't approved before October - you could be vulnerable. Speak with your loan professional and insure your loan is on track and not subject to delays caused by a budgeting hiccup.

Friday, September 15, 2017

Seller Accepts an Unsolicited Commercial Real Estate Offer - 5 Reasons Why

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Recently, I penned a post entitled "Should I Accept an Unsolicited Offer for my Commercial Real Estate".

If you missed the post, you can quickly catch up by clicking here. 

The conclusion? - a resounding no. It is my firm belief, a seller can achieve a higher price by putting the market forces of buyers competing to work.

OK. Got it? Then why would any seller accept an unsolicited offer for their commercial real estate? In my opinion, the reason is contained within the list below.

Seller is desperate. More is owed than the property is worth. A lender has called a loan against the real estate. The operating company housed in the building filed bankruptcy. All could lead a seller to be desperate. If the property is marketed, the desperation becomes public - disclosed, discussed, and baked into the offering prices. Such desperation can also carry a tight time frame which won't allow a normal marketing process to be conducted.

Seller wants to avoid disruption. An owner occupant is concerned by the business interruption a marketing process will create. After all, folks will want to tour - during normal working hours when you are making and shipping things. Tours - unless very carefully controlled - distract employees and add a layer of suspicion by those working in the building. If a seller has not told his employees he is selling the building - you don't want them to find out from someone walking by their office.

The sale is a part of a bigger sale. Frequently, the sale of your commercial real estate is coupled with a sale of the business that occupies the premises. Because two sales are involved, the commercial real estate sale may pale in importance to the business sale. In such an instance, a marketing process for the building is jettisoned in favor of the business deal.

Seller is unsophisticated. Rarely is this the case. With access to on line research and countless commercial real estate professionals at the ready, most owners of commercial real estate are quite knowledgeable about the market and property values. However, in limited circumstances - and out of convenience - a seller may react emotionally to an unsolicited offer and accept it without testing the market.

The unsolicited price offered cannot be bettered in the market. I've seen this happen recently. Precautions must be made, however. You must be crystal clear with a seller - based upon what we are seeing in the market - recent sales, current avails, investor motivation, etc. - what is before you is as good as a marketing effort will produce - and without all of the appurtenant disruption a marketing process will create.

Friday, September 8, 2017

4 Ways to WIN a Commercial Real Estate Deal

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The commercial real estate market in Southern California is as competitive as I've ever seen it. And, by the way, email didn't exist when I started in the business - so, that's a long time.

In a classic economic sense, an imbalance exists. We have too many buyers chasing too few availabilities - akin to a giant game of musical chairs - someone will be left standing when the music stops.

So, how should you position yourself and your company to win when the right opportunity comes along? Allow me to discuss a few ways.

Financial qualification. Your bank will gladly loan you money to buy a building - they've told you so. But, have you allowed your lender to peruse your current financial statements and tax returns? You are best served securing a pre-qualification letter. But, not just any pre-qual letter - one that included a complete review of your current financial snapshot.

Remove any contingencies. Do you have a property to sell before you buy? If so, your deal may be overlooked for another that is ready to go. Does the occupancy for which you plan to use the building conform to the zoning? If not, plan on 6-9 months of city approvals - once again, you lose because a compatible use will avoid the lengthy approval process. Is the source of your down payment liquid? Are the members of your team in place - legal, architect, contractor, CPA? Any unchecked box here could result in your loss.

React swiftly. In order to quickly mobilize, you must have a ready source of new and off-market availabilites. Our residential counterparts have made on-line searches easy for you - we commercial agents have not. Therefore, you will need to team with a commercial real estate professional to search. Sure, you can check Loopnet, but the reliability of the data is suspect. Regardless, your professional should create alerts for new buildings which match your requirement. When you get the call - regardless how late on a Friday - REACT!

Don't TELL your story, SELL your story. Recently, we competed against four other offers for a building. We believed our buyer could pay the highest price and perform. We encouraged our buyer to offer at the asking price with a very quick close and a limited amount of due diligence time - our buyer complied. Now the task was to prove our buyer's credibility. We did so in person vs an email that could get overlooked - in effect, we sold our story. Our strategy worked and our buyer won the deal.

Thursday, September 7, 2017

How to Finance Commercial Real Estate THURSDAY Thoughts for Commercial...

Today on THURSDAY Thoughts for Commercial Real Estate, I discuss the ways a typical buyer finances a commercial real estate purchase. I discuss this and much more on this edition on THURSDAY Thoughts.

How to Finance Commercial Real Estate THURSDAY Thoughts for Commercial...

Today on THURSDAY Thoughts for Commercial Real Estate, I discuss the ways a typical buyer finances a commercial real estate purchase. I discuss this and much more on this edition on THURSDAY Thoughts.

Friday, September 1, 2017

A Commercial Real Estate Deal is Really 3 Negotiations

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As if one negotiation is not enough, we in the commercial real estate profession insist upon three separate negotiations for every deal. Why you may ask? Let me spend a moment and give you my take.

Negotiation One - The proposal. Once upon a time and not too long ago, a buyer's expression of interest to buy a property from a seller took the form of a binding offer - the deposit receipt and escrow instructions. Outlined were the price, escrow period, loan amounts, representations and warranties requested of the seller, and a period for due diligence and closing. The buyer signed the offer, deposited a good faith deposit with the broker and hoped his representative could convince the seller to make a deal under acceptable terms and conditions. Created, were all sorts of problems with this structure. Few buyers took the time to review the document they were signing. Misunderstandings occurred. Buyers changed their minds. Sellers decided not to sell. The impact of the sale weren't properly vetted. Buyers made commitments to move which backfired when the deals were not closed. Litigation ensued. Quite a mess. What evolved was the non binding letter of intent. Most negotiations now originate with such a letter.

Negotiation Two - The purchase and sale agreement. Because the first negotiation is via a non-binding letter, the agreed upon terms and conditions - such as the price -  must be placed in a document that will commit the parties to accomplish certain things - such as opening an escrow, notarizing grant deeds, delivering clear title to the property, representing the seller is authorized to sell, etc. Ample time is given to the buyer and seller to comment on the specific language of the agreement and request changes - another negotiation. Once the binding purchase and sale agreement is signed by the buyer and seller, a period of buyer due diligence commences. During this period of time, the buyer arranges financing, checks out the physical aspects of the building - roof, fire suppression system, plumbing, electrical, heating and air conditioning, reviews the title to make sure no matters are looming, checks out the condition of the soil for potential environmental contamination, and visits with the city to insure the buyer's proposed use for the building is allowed - quite a bit to accomplish in a 30-45 day period.

Negotiation Three - The end of due diligence. Presumably, the buyer has completed all of their inspections, the lender has approved the loan, title is clean and ready to be transferred and the deal can safely move toward closing - ooops, not so fast. Invariably, something is uncovered in the due diligence period that surprises the buyer and causes another round of negotiations. These surprises can be as simple as a roof repair and as complex as an environmental clean-up. Sometimes, the issues can be fixed with a dollar credit from the seller to the buyer. However, sometimes the problems are more systemic and can result in a cancelled transaction.

Thursday, August 24, 2017

BIGGEST Mistake Occupants Make THURSDAY Thoughts for Commercial Real Es...

Please take a look at my current video which discusses the BIGGEST mistake commercial real estate occupants make when considering a relocation. I discuss this and MUCH more on this week's VIDEO.

THURSDAY Thoughts for Commercial Real Estate

Friday, August 18, 2017

The DOWNSIDE of an Off-Market Commercial Real Estate Deal

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As recently discussed, our commercial real estate market these days is heavily weighted toward sellers – akin to a boxing mismatch, buyers are outclassed and must muscle up to counter the punches thrown by a market favoring seller. 

If a seller lists his commercial real estate for sale, prices it fairly – or even unfairly in some cases – and assuming the building has good amenities, a ring full of buyers crowds his corner – with gloves full of cash – shortly after the first bell.

We, as the trainers – AKA, the buyer’s representatives – set out to find a fairer fight. We contact owners of commercial real estate and ask them if they would consider selling to our buyers. In rare instances, we find a willing seller which creates an “off-market” deal. Great! But, what are the problems with such a transaction? I propose we spend a moment and discuss the downside.

The seller has no advocate. Generally, a seller engages a broker to represent him. Incumbent upon a seller’s rep are the duty to place a seller’s interest above those of the broker. Included in the representation is a pre sale conversation involving a review of the current market conditions, an outline of a comprehensive marketing plan for attracting the highest purchase price in the least amount of time, candid discussions about the tax impact of selling, agreeing upon the touring protocol, and disclosing the selling plans to employees who occupy the building. In an “off market” transaction, none of these confabs occur and the seller potentially enters the deal uneducated about the process. Without a seller advocate, the buyer enters the ring with an advantage. Good for the buyer. Bad for the seller. Generally, the seller figures out he is not benefited by the lack of representation. In this market, a seller’s rep will counsel his client on the importance of running a process to find the BEST buyer – rarely the outcome of an off-market deal. I recently witnessed an off-market transaction that yielded a price for the seller 30% below the prevailing values. Ouch!

No vetting has occurred. Unresolved title issues such as tax liens, un-recorded easements, or loans against the property have not been investigated. Systems – the roof, fire suppression, and heating ventilating and air conditioning, have not been inspected. The tax impact of a sale has not been calculated. Are there any pre payment penalties that must be addressed prior to closing? Any and all of these issues can cause a knock out which means the bell rings on your commercial real estate deal and you are not the winner.

Friday, August 4, 2017

Is it Better to OVERPAY for Commercial Real Estate or Pay the Taxes?

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You've sold your commercial real estate. Proper steps have been taken to funnel the sale proceeds into a qualified intermediary as the first step to perfecting a tax deferred exchange - a way to buy more commercial real estate and defer the tax obligation. 

A careful review of buildings available for sale has given you the sense the market is over-heated. You are concerned you may overpay for a building - pay more than the building will be worth in future years - after all, its a great time to sell but not a great time to buy. 

So, is it better to overpay today and risk the building declining in value or simply pay the taxes - which as previously discussed could amount to 35% of your take. 

One thing is certain. If you don't buy commercial real estate and perfect your exchange - you WILL pay the taxes. Let's use a hypothetical amount of $2,000,000 as the sale price for the property you sold. By the time you layer in federal, state, and Affordable Care Act taxes, your tax bill will approach $700,000.

The overpay is not as certain.

If you are considering replacing your $2,000,000 sale with a $3,000,000 buy and you overpay, your $3,000,000 must decline to $2,300,000 - a market adjustment of almost 25% -  for the offset to equal your certain tax liability. We witnessed the market decline by over 25% in 2009-2010. But, now our values are back and have exceeded our previous 2007 highs by 30%. Plus, three things have changed since the lows of 2009-2010 – new construction hasn’t and will never match demand, thousands of square feet of industrial inventory have been scraped in favor of multifamily development – thus a lower base, and 98 of every 100 buildings are occupied - the lowest vacancy in history.
One way to compensate for an overpay is with a long term lease – a bridge greater than five years. Commercial real estate values tend to ebb and flow over seven to ten years. I have a client who made a lease in 2008 - at the top. Through the term, market lease rates dipped. It's now renewal time and the lease rates are back to the top.  

Still not convinced? If you believe you are overpaying – would it make sense to overpay for a perfect building vs over paying for an building with challenges? My experience is good buildings stay leased.  A challenged building – even in good times – will have leasing issues.

Thursday, July 27, 2017

Should You Lease or Own a Commercial Building with Allen Bu...

How do you know if you should Lease or Own a Commercial Building for your business needs?

The economy is growing, rents are rising, and commercial real estate space is more difficult to find. 

So what questions should you answer to know if you should lease or own a commercial building for your business needs ?

Allen Buchanan is a principal with Lee & Associates in Orange County, CA and a true commercial real estate pro. He has specialized in industrial space sales and leasing since 1984 and provides the following tips for business owners considering purchasing a commercial building. 

Questions to ask before buying commercial real estate

Where is the market in the cycle? Commercial real estate is very cyclical. It is important to consider what is the current state of the market. Is space plentiful or limited? Are capital markets willing to lend with favorable terms? Is there an expected growing demand for space like you need?

Who are You?
What type of company is yours? What are the space needs for your business? Do you expect to outgrow your space in the next three years? Are you making money? A lender will look for a favorable track record including, have you been in business for at least five years? 

If you are stable, have a proven track record, and anticipate the continuation of your business and have the time to benefit from long term appreciation, buying might fit be for you.

What are the Steps to Buying Commercial Real Estate?
If you have been in business for a while, you likely have received numerous calls from commercial real estate brokers. If you are thinking about buying, interview a couple of theses brokers and find out if they can potentially be a resource for the time it takes to find a property.

Find out if you are eligible for financing. The commercial real estate broker can point you to a potential lender. Typically SBA loans and brokers provide some 

How long will it take? To be successful, you should plan on one to two years before you are moving into a new property. The lengthy process includes:
Potential misfire
Loan underwriting
Physical inspection
Build out
Permitted usage question and answer with city

What are the Benefits to Ownership? 
Long term, for the right situation, you can benefit significantly through:
Appreciation: rent increases and demand will push the value of the building up over time. Provided you have the time, this is a huge opportunity.
Depreciation: for the owner of the building, the purchase price or the structure can be expensed over 39.5 years.
Cost stability: when you own a building, you can more easily control the cost of space for your business needs.

For more goto:

ROOF Issues. Who pays?

Summer is a great time to consider an annual roof maintenance before the rainy season is upon us. Are you aware who is responsible for your roof maintenance? How about the repair of your roof? What if the roof needs replacing? If you own and occupy your commercial real estate, you are responsible for all three. But, what if you are a tenant? Knowing these things could save you thousands of dollars. I discuss this and much more on this week's edition of THURSDAY Thoughts for your commercial real estate.

ROOF Issues. THURSDAY Commercial Real Estate Thoughts

Friday, July 21, 2017

A Shortage of Commercial Real Estate - But Why?

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Supply and demand. A basic economic principle first discussed in the seventeenth century by scholars such as John Locke, Sir James Steuart and Adam Smith.

This Adam Smithian see-saw has broad implications in the commercial real estate market. If supply exceeds demand, a buyer's market ensues. Conversely, sellers win when demand exceeds supply.

Currently, Southern California is engulfed in a seller's market largely because of this imbalance between available buildings - supply, and businesses looking to expand - demand.

Seldom discussed, however, are the reasons such an imbalance exists. The reasons, dear readers, are the subject of today's post.

Lack of new construction. An spate of new construction would in fact cause the supply of available inventory to increase - resulting in a parity of demand and supply. But akin to fighting a wildfire with a water pistol, the thirst for supply will not be completely quenched with new construction. So with this shortage of supply, why haven't we seen more building? The reasons are simple. Southern California has a lack of undeveloped land. Virtually all of the new construction we've seen in recent years has started with a site containing obsolete buildings that were razed to accommodate the new construction. New construction is expensive. Land prices are a huge component of new construction - in some cases measuring half the cost - especially since the land includes old buildings that need demolition. The entitlement process is challenging. Cities and counties locally have extensive regulatory requirements in place which add months to the construction time of a new development.

A re-purposing to housing. Many, many thousands of industrial square feet have been retired in favor of high rise apartments and condominiums. Doubt what I say? Just take a look at the area surrounding Anaheim Stadium or John Wayne Airport. Formerly, those areas were home to local manufacturing and logistics businesses. Now gracing the skyline are three and four story buildings under construction that will provide much needed housing to stem another shortage - but at the expense of buildings where people worked and products are made and shipped.

Money is cheap. Companies can invest 10% of the purchase price of a building, finance the balance with a loan through the Small Business Administration, and with Eisenhower era interest rates, enjoy a payment that closely approximates a lease payment - but while owning. A multitude of companies have taken advantage of this structure and the abundance of capital.

When will our markets return to normal - if you can define normal? Unfortunately, my crystal ball is as murky as the SoCal sky on a June morning.

Thursday, July 13, 2017

Keep your ENTITY Viable. THURSDAY Commercial Real Estate Thoughts

Recently, I was engaged by a property owner to sell his property in Southern California.
We discovered the LLC that owned the buildings was suspended by the Franchise
Tax Board. After some weeks and thousands of dollars, we revived the LLC and
were able to close our sale. DON'T let this happen to you!

Keep your ENTITY Viable. THURSDAY Commercial Real Estate

Friday, July 7, 2017

What will Cause these INFLATED Commercial Real Estate Prices to Drop?

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At their very essence, commercial real estate values are a result of the price a ready willing and able buyer, with reasonable motivation, will pay and a ready willing and able seller will accept. Easy enough.

Let's layer in some complexity, however, as the previous statements assume the ready willing and able buyer will write a check for the purchase. In reality, most buyers seek financing for their buy - which sets in place an approval process from a lender.

Typically, lenders - short of Aunt Mabel who taps her trust fund for you - will require an appraisal - regardless of the size of the down payment. Hmmm, so if the ready willing and able buyer and seller agree to a price and the lender's appraisal doesn't conform, the transaction has an issue? Yes. Absent another buyer, willing to assume the previous buyer's agreed upon price - without a lender this time - the seller must reduce his price, the buyer must inject additional cash to bridge the gap or something in between. So, the first cause of a drop in pricing would be - the property won't appraise. 

But, what are some other reasons?

A spike in interest rates. An obvious result of an increase in borrowing costs, would be higher payments. Higher payments - fewer buyer's can qualify for financing - fewer buyers, less competition - a drop. But, a spike in interest rates could also cause business activity to decline. The resulting lack of business could place less pressure on a company's need for space. Demand for space subsides - fewer buyers - Boom! prices drop.

The Black Swan event. Transactions occur when prices are increasing or when they are falling. When prices are on the up, sellers win. Buyers score when the reverse happens. Uncertainty - I'm not doing anything until this is resolved - is a result of the Black Swan event such as a war, a collapse of student loan repayment, terrorist attacks on our soil, foreign leaders who launch a missile, a government shutdown, or a county bankruptcy - as we experienced in 1994 in Orange County.

New inventory. We've been awaiting the building spree of new buildings for quite awhile. Yes. We have added some new buildings, but we have also seen many others demolished in favor of high rise apartments. In short, for myriad reasons - which will be left for another rant - the supply of newly constructed commercial real estate has not kept pace with the demand.

Buyers say enough is enough. Recently, we accepted an assignment to help a buyer find a new home for his business. When we commenced our touring of the available choices - the buyer was disappointed at the lack and of the quality of available buildings - plus the asking prices were jarring. Flash forward, asking prices have now hopped another 15%. Our tour last week was met with, "wow! how have asking prices increased that much in fewer than two months?" It dawned on me. If buyers refuse to pay the prices - which is unlikely - prices will drop.

Its akin to a giant game of musical chairs. This era of crazy money paying outrageous prices for commercial real estate WILL stop - we just know when.