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.