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

Market
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:
Search
Potential misfire
Loan underwriting
Physical inspection
Appraisal
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.


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www.allencbuchanan.com
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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

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.

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
Thoughts

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.