Friday, December 28, 2018

Is NOW the Right Time to Sell?

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Wild stock market gyrations. A trade war with China. Housing metrics that would suggest a shift, large corporations announcing dramatic layoffs, rising interest rates combined with record low unemployment, a media touting the booming economy, and a recovery spanning nine years. So where are we headed? Great question. And one that is pondered by hundreds of small business owners every day.

A pall of uncertainty now shrouds our consciousness and permeates our conversations. Uncertainty. The circumstance that can change a robust commercial real estate market to a tepid one in no time.

When folks are uncertain - decisions are postponed. Postponing decisions - adding workers, buying new equipment, expanding into another market, or acquiring a competitor create a holding pattern for new building space needs. Given enough hesitation - our commercial real estate market freezes and lease and sale transactions are delayed.

I am certainly not seeing a rush for the exits as we witnessed in 2008 and 2009. But, the entrepreneurs I counsel are certainly making a note of the exit’s locations.

So, what should you do if you’re contemplating a commercial real estate move? I would make the following suggestions.

If you are a seller. Examine why. Be realistic. Don’t wait. You’ve elected to move your company out of state and determined your California location is excess - a good reason to sell. Your neighbor’s building traded at a record high number and if you can get a similar price - you’re a seller. If not - you’ll hold. Not a good reason. 

Marketing time, variance in ask vs take, number of buyers inquiring - all have morphed from a seller’s advantage to a buyer’s. Certainly deals are transacting - but in more neutral setting. My opinion. We will encounter a much different selling environment at the end of next year than we are seeing today. Sales will occur - but at much more realistic prices. So if your selling for the right reasons - do so now.

If you are a buyer. Be aggressive. Hold firm. Walk away. The era of crazy asking prices followed by multiple offers and feeding frenzies are behind us. In order to sell these days - a seller must respond to the offers he receives - even if they are below his expectations. Sure. Limited availability means fewer choices - but that will change. I’ve seen a shift toward bringing buildings to market NOW vs waiting. A few more availabilities coming on line will quickly balance the supply side and force sellers to come to the table.

If your lease expires next year. Understand your value. Know the market. Be aware of your alternatives. To replace your tenancy costs money - in some cases 20-25% of the total amount of your lease. If you bolt - your owner must now refurbish your space, lay fallow, concede some rent, and pay a broker to achieve a market rent. In a changing environment, the time needed to locate a new resident increases - which is lost revenue. Use this to your advantage to drive the best deal. Finding an adamant owner may generate a compromise in a higher lease rate but for a shorter duration.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, December 21, 2018

Commercial Real Estate Advice - When Do You Need It?

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Seemingly an easy retort? Certainly. I need advice when I’m buying, leasing, or selling. These three circumstances would apply to either side of the aisle - whether you are an owner or an occupant of commercial real estate. Ok. Done for this week. Well, not quite and since I’ve a few more words - indulge me as I share a few more situations in which commercial real estate advice may be necessary.

A transition. Twice last week, I counseled occupants that shared this circumstance. Both enjoy the benefit of owning the buildings their companies occupy. When the buildings were purchased - Bill Clinton was president. Ownership of the business and building were synonymous - albeit with different entities. Flash forward. Due to a couple of untimely deaths - the LLC building ownerships only have one common link to the operation’s management. Plus, in one case, the company finds itself with too much space - in other words the building no longer works. Where before both occupant and owner sang from the same song book - now the music is a bit off key. Needed is a careful parsing of objectives and a clear path forward.

Efficiency discussion. How do you get the very most productivity out of your manufacturing location, your suite of offices, or your retail store front? Often, the answer is not a move but a re-tool of the flow of the operation. Countless times I’ve toured a warehouse distribution building with the premise - the operation is out of space. Sure. The floor is consumed but the inventory is only stacked to half capacity. This “cube” space is free if you can utilize it. You see, commercial real estate is billed by the square footage. Simply, you pay for the floor area - not the volume of the building. A better investment - vs a move - might be in a new forklift to reach the heights of the building’s ceilings.

An alignment of motivation. What is optimal? Often, I find an in-depth discussion leads to a solution no one had considered. For instance. If operating capital is needed - why sell a building you own with no debt - only to suffer the consequences of Uncle Sam’s outstretched hand. A better cure may be a re-finance of the building’s equity. Another circumstance. Why hold out for the last dime with your occupant who is approaching the expiration of his lease? A simple math exercise should show you how costly replacing his tenancy will be. Share the savings. If he renews - even at less than a market rate - you both win.

What is ahead. Many of my meetings these days start with the question - how is the market? My response. We are seeing signs of cooling - variance in closed amounts vs asking prices, more time on the market, fickled investors, a more cautious - “let’s wait and see” attitude from occupants. The crazy thing - this slow down in activity hasn’t resulted in a rise in our vacancy - but it will. You heard it here.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, December 14, 2018

Five Year-End Considerations for your Commercial Real Estate

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A column like this one would normally be reserved for a period closer to Auld Lang Syne. However, with the dawn of December and Black Friday behind us - we will blink our eyes and it will be 2019. So let’s get a jump on those year-end issues - shall we?

Here - in no particular order are the five things I suggest you 
address during the final month of 2018.

Budget for 2019. If you are a tenant, chances are the owner of your building has compiled a projection of operating costs for 2019. Taken into consideration are things such as property taxes, insurance, utilities, landscaping and any repairs planned for next year. These estimates are rolled into a monthly bill which you will receive January 1. As the occupant, you have the right to audit these expenses - which I recommend you do. If you own the building you occupy - I suggest you undertake a similar accounting. Simply take a look at that property tax bill you received in October. Remember the first half is late if not paid by December 10. Next drag out that insurance premium and review it. Finally, will your gardner expect a raise next year? Are you planning to add solar or replace the roof? You now have the basis for billing your occupant.

Locate your lease. Easy, right? Except when it’s not. I’d suggest keeping both a digital and a hard copy. Make sure you have the latest amendment signed by you and the owners. Next take a quick peak at things such as the expiration, options to extend or terminate, and increases in your base rent. Calendar any dates of importance for 2019. Must you give your owner a six month heads up you will be exercising your tight to expand into the suite next door? Yep. How’s the time to note that. No lease with your tenant? No better time than now to commence a new one come January 1.

Check on your loans. Will any of the debt mature in 2019? In our environment of rising interest rates - now may be a great time to re-finance. If you agreed to a variable rate loan - your payment may be bumping up. Plan accordingly.

Tune up those systems. Roofing companies get very busy and very cranky once the rains hit. Doubt what I say? Ok. Just wait until you’ve water pouring onto your computer numeric machinery and need someone to immediately patch the hole. Good luck! During the brief business respite we experience during the last two weeks of the year - why not engage your roofer to complete an annual maintenance? Now that the weather is cooler - have your HVAC company replace the filters and insure all is well with the cooling. Finally, has your warehouse sprinkler system been certified recently? Take care of that while the timing allows.

Project. Will 2019 be business as usual? Or, will next year find you searching for a new building to buy or lease? Remember - inventory is still scarce. Plan for the process to take longer.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, December 7, 2018

3 BIGGEST Issues Confronting Occupants of Commercial Real Estate

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As a commercial real estate professional - my travels take me to many cool businesses. You see, close to half of my practice is consumed advising owners of closely held manufacturing and distribution operations on their commercial real estate requirements. A typical week will include three to six meetings with entrepreneurs. Resulting from my outreach is a “pulse” of sorts on the issues facing these companies - the occupants of commercial real estate. 

So, what are these business owners sharing with me? That dear reader, is the subject of today’s column.

Lack of quality employees. Unemployment in Orange County and the Inland Empire is the lowest in history. Doubt what I say? Try this simple exercise. Next time you’re out to visit your neighborhood - you decide - observe the number of “help wanted” signs. They are everywhere! Add a bit of skill or complexity to the position - a computer numeric machine operator, welder, diesel mechanic or heavy equipment driver - good luck. “Poaching” trained workers from competitors is widely practiced these days. What is the solution? In my opinion, a more focused effort on the part of our community college system, trade schools, and vocational training in our high schools to prepare young folks for the skills necessary and the jobs available.

Increasing costs. Minimum wage, rents, tariffs - all add to the up-tick in operating costs. Let’s take your typical distribution company as an example. Defined is a business that stores and ships things - but doesn’t necessarily make the items they ship. Contained in their operating expenses are three main categories - labor, space, and the price of the products that enter and leave the warehouse. See any issues there? Yep. A distributor’s three main cost centers are increasing wildly! Here is a simple example. If rents bump up by 30% - that company must figure a way to absorb the higher cost. He’s three options - raise prices, lease fewer square feet, or take the hit in his bottom line.

Legacy. Countless small business owners with whom I deal are on the back nine of their careers. Many are thinking about the 19th hole. The problem is - too few of them have an exit planned - a family member who will assume the reigns, a sale of the business to a competitor, or what will be done with their commercial real estate once the company is sold. Once such operator finds himself with a building ownership which doesn’t mirror the company ownership. By the way, he is the common member of both. Now he faces differing motivations when it comes to the real estate direction - sell, raise rents, etc.

What issues is your business facing? I’d love to hear from you.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, November 30, 2018

The “Brady Bunch” of Facilities

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Our week was highlighted by two meetings which were of particular interest - thus my desire to share. Common among both operations with whom we met was the recent acquisition of a competitor.

Akin to the comedy sitcom of the 1960’s - The Brady Bunch - where two families were melded into one - both companies now find themselves with the task of managing the excess or inefficient capacity.

As you know, if you’ve watched reruns - Marsha, Greg, Bobby, Cindy, Peter, Jan, Mike, Carol, and Alice ultimately co-habituate peacefully - although five seasons and 117 episodes were consumed telling “the story of a man named Brady.” A similar saga occurs when two businesses are joined at the hip.

In the first case, growth had occurred organically - with great products marketed to a number of customers who saw the value and bought more. With an increase in sales and the need for more space - each operator looked to proximate buildings to house the explosive up-tick in orders. Each enterprise functioned - albeit a bit clunkily.

Flash forward. Packaged were two groups that essentially served the same buyers but from different operating facilities. The “marriage” created a behemoth of inefficiency - with receiving, manufacturing, storage, shipping, sales, marketing, accounting, and management essentially quintuplicated. 

Now considered is a consolidation into one facility - essentially moving the Bradys into a house in Studio City. Carefully vetted in the weeks ahead will be the disruption of production, moving costs, future needs, available buildings, disposing of the existing lease obligations, and return on investment. Should be fun!

Our second group achieved its size through acquisition. Consumed was any competitor in its path. Awesome. But the wake is similar to the Brady union - you’ve two sets of kids - pairs of whom are the same age. In commercial real estate parlance - the business has duplicated its distribution footprint serving the same geography. Complicating the equation - a trend in logistics - higher ceilings and larger truck courts. Allowed is the occupation of fewer square feet - stacked higher with product and accessed by longer trucks containing more inventory.

 Ultimately, a distributor can occupy fewer square feet and store the same amount of stuff. We now must figure out where the employees live, proximity of the centers to their customers, and the right sizes for the mirrored buildings. Just a simple puzzle to solve!

Stay tuned in the week’s ahead for an update on our progress.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, November 23, 2018

Is NOW the Right Time to Move?

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In a word - actually two - it depends. Today, I recap a week of meetings, situations, and the counsel we provided to businesses who believed a move was imminent.

What’s prompted the need. We met with a group last week that recently signed a two year lease extension on their space. Well entrenched are they in the building - as 35 employees arrive each day to go to work. As their product is purchased off-shore and subject to a large tariff - they pre-bought a year’s worth of inventory - which arrives in January. They now have a short term warehouse need. Rather than disrupt the entire operation, the solution appears to be an auxiliary space - in addition to the mother ship. Stay put and lease a unit close by.

Moving expenses. Most will under-estimate this cost! Depending upon the complexity - the figure can easily eclipse six figures. And, this is a stiff cash outlay day one - not an expense paid over a number of years - like a lease or mortgage payment. Faced with a rent increase of 45% - we encouraged a client to put a pencil to the new monthly rent times the number of months for the lease. The increased rent consideration was smaller than the moving costs. Even though a larger monthly outlay is coming - avoided is the moving van. Renew.

Your current situation. Under-utilized. That describes a footprint we toured this week. Changes in the stock on hand and and lagging caused a surplus of space. The easy fix? Downsize. The issue? Nothing is available that would fit the requirement. Plus, because the company benefits from a lease rate that commenced in 2012- a space 40% smaller would figure in the same monthly rate as their larger space. No move here.

Extension rights. Many companies transacted in 2011-2014. Five to seven year leases are expiring this year and next. Contained in many of these contracts are favorable extension rights - options to renew at pre-set rates, rights of first refusals on adjoining spaces, or options to purchase the premises. We encountered such a gem, recently. Origination of their seven lease happened in 2013. Guess what? If they want to stay come 2020 - they can. No negotiation needed! Why would you move?

Ways to stretch your space. We encounter so many situations where a tweak here or a tuck there can postpone a move for months or even years. Advanced material handling solutions, the addition of a production mezzanine, or the use of a third party logistics provider are three such ways.

The cost of your alternative. On deck next week is a conversation with a local distributor. Serviced is the entire SoCal basin from one owned and one rented location. Neither fit the operation anymore. So, do they sell one building and buy two? Renew their lease in one and sell the other. Sell the building and replace it with one more central to their customers? The options abound! Should be a fun conversation. Stay tuned.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, November 16, 2018

The Downside of a Move out of State


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Yesterday, I concluded a meeting with a local manufacturing and distribution company. Family owned and operated by two California born and raised principals - the business has experienced exponential growth over the last couple of years.

That seven year lease signed in 2015 - which was to adequately house the operation - has now become a liability - as the operation is bursting at the gills. All measures have been taken to efficiently use the space available - creative material handling, automation, storing product off-site, outsourcing - but the fact remains. The company will have to move before the lease terminates in 2022.

Three options are now on the table - a relocation down the street to a space 50% bigger or a move out of California - to either of two business friendly states. Moving a mile or two down the road is a simple fix with measurable benefits - more space, less disruption, employees retained, done! However, this ownership has seized the opportunity to consider another - more forward thinking and long term solution - a move east - like well east of the 57 Freeway.

As previously described - a move out of California carries significant upside - a more business friendly environment, fewer regulations, cheaper housing, no state income taxes, and utility subsidies.

But with the ying of reasons to move - there is also the yang of negatives. That downside - dear reader - is the subject of today’s column. So, before you load that moving van - please consider the following.

Lack of available buildings. Even with the desperately low availability of commercial real estate these days - we still have created a base of existing buildings which totals billions of square feet. Anaheim alone has close to 100,000 million square feet of existing industrial buildings. A visit to Allen, Texas or Greenville, South Carolina and you’ll find acres of vacant land - but very little standing inventory. The oweness is placed upon you to build your own facility. Even with a land gift and streamlined permitting - you’re looking at 12 to 18 months of construction. Don’t forget the land freezes in certain places east of here. Oh, yes, and consider other delays - such as rain.

Skilled labor shortages. If your operation requires a level of expertise to operate computer numeric machines or tool medical devices - you may be sorely disappointed in the pool of employees. Granted, states are working with community colleges to train people with the necessary chops - but you’re still looking at a deficit.

It’s difficult to move back. Once you decide to sell that home in Corona Del Mar and move to Nashville - the barriers for re-entry are akin to an Apollo spacecraft returning from Lunar orbit. Sure, you can keep your place here - but our golden state will want a taste of the company’s profits - which defeats the purpose of an out-of-state location.

Cultural differences. There is no place quite like California - even with its warts. This from a man who lived his formative years well south and east of here. It’s said in the South - “folks will treat you nicely - but, won’t trust you unless they trusted your grandfather.” Where do you think the “old boy network” originated? My 85 year old mom still refers to her neighboring Cooper Rubber execs as the Yankees up the street. The family moved there in 1965! Just sayin.

The WEATHER! Folks who have never experienced six weeks of sleety ugliness each year take for granted the 300+ days of sunshine we enjoy. What’s overlooked is the loss of employee productivity where weather is a factor. Sure, four seasons are cool - unless you have to live through them. If you want to see leaves turning - or snow - just make a weekend jaunt to Oak Glen. There! Seasonal fix administered.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, November 9, 2018

What I Learned from this Year’s Conference Season

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I just returned from a tsunami of travel. Traveling for business is rare for me - which is one of the reasons I chose this profession - as most of my clients are within a short car ride.

October is the exception as this time of year is conference season. Most commercial real estate companies host their annual meetings in the fall and generally all of our professional organizations - SIOR, CCIM, ICSC, CORENet, etc. follow suit. So after six flights, eight Uber rides, and dozens of “what market do you serve?” - today is a recap of my takeaways.


Our industry hasn’t changed - EVER. Largely dominated by old grey haired white guys - we have been slow to adopt new technology and hire women and minorities. I did notice more women and youth in our gatherings - which is awesome. Our European affiliate even noted “most global corporations are looking for diversity when granting assignments.” It’s stunning to me how few of us capitalize on the cool techno tools available to us these days, however. Most still don’t employ a CRM such as SalesForce to track our activity.

Most professionals miss an opportunity. To travel many miles only to hang out with folks from your local office makes little sense to me. Sure. I get it. There is familiarity there. But seriously. Stretch your boundaries. Make new contacts. Put it out there. How else do we learn new “best practices” and build new relationships?

A slowdown is coming. The elephant in the room was the potential softening of the commercial real estate market. We’ve all greatly benefited from a solid ten year run. We know a dip is imminent - we just don’t know when. Most I spoke with believe we will sense a slowdown late in 2019 or early in 2020.

Networking is a contact sport. You gotta press the flesh. I met people from all over the US, Canada, and the UK. My network expanded exponentially. Follow up is critical - thanking and then staying connected. I use old fashioned thank you notes plus an occasional article, email, and call to remain top of mind.

How did we survive before Uber? I am astonished by how this start-up has revolutionized travel. Walk off the plane, quick schlep to the “smart phone app ride area” - yes - airports have them now, whip out your device, boom. You’re off. No more creepy cab rides, endless rental car lines, or expensive long term parking. I’ve even started Ubering to meetings in LA. I get a couple of hours to dial the phone or answer emails. Amazing.

Is Blockchain our disruptor? I listened curiously as one of our keynotes explained blockchain technology. Simply, blockchain is a summary of transactions - the block - linked to numerous de-centralized computers - the chain. Allowed is a seamless exchange of business between parties. Underlying the crypto-currency - such as bitcoin - is blockchain technology. 

So, if your industry has a data set of deals - procurement, logistics, yep - commercial real estate leases or sales - your role of middleman could be vulnerable. I’ve not retired my license just yet - but I wonder where I’ll return my Kenmore tools?

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, November 2, 2018

Catch the First Wave - There may not be Another!

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As a market cools - we begin see a lack of activity on listings for sale and lease. Imperative in a transitioning period is pricing. You see, if an offering is priced at a crazy high level - the active buyers and tenants will simply wait until your pricing is more realistic.

Generally, you will get a “first wave” of interest. If you’re fortunate - one of these first responders will submit an offer. Don’t be shocked if the proposal is well below your asking price! Now, the tough part - take it. Certainly, your tendency is to stall until something better rolls along - but currently - that first wave is followed by a sea of tranquility.

So what should you do if you find yourself paddling in a placid pool? These five suggestions should help.

Take a look at the competition. Enlist your commercial real estate professional to take you on a physical tour of your completion. Sure. You can accomplish this on paper but if you get in the car and look at other things available - you will see the market through your buyer’s perspective. Carefully notice how you stack up - amenities, asking price, time on market.

What else has leased or sold. Have other buildings - similar to yours - traded? You’ll want to key in on a similar time frame - simply, competitive offerings marketed at the same time as yours. Why did they sell?

Have your first responders transacted elsewhere? Chances are your offeror has not made a deal. The weird thing about this evolving market is availability is still low yet buyers are proceeding cautiously. However, if that interested party leased another property - figure out the motivation.

Offer a time sensitive bonus. For a deal completed by the end of the year - rebate the cost of an environmental report. Give an abated rent schedule to a tenant willing to make a lease by the end of the month. Many times these “incentives” will jump start your activity.

Create a broker incentive. First, start with a gift for showing the space to a qualified prospect. Next, reward an offer with a better gift. Finally, offer a full commission or a two week cruise to the selling broker. With thus simple three step process - you generate showings, encourage offers, and reward success.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, October 26, 2018

If Your Building Sells - What Happens?

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This week our team was contacted by an owner. Desired is to sell his building and re-deploy the equity into a college education for his children. A noble cause - to be sure - but one with some considerations.

Are you taxed? Yes! You see, once the sale closes, the Federal government will tax the long-term gain - appreciation of more than a year. Taxed at a higher level will be the depreciation re-capture. Don’t forget the new Affordable Care Act tax for any asset sold for more than $250,000. Oh yeah, and then our Golden State will want a taste as well. For those keeping score, all of the taxes can amount to almost half your gain! Ouch!

Outlined above is the first thing which occurs once your building sells - you’re taxed out the wazoo - unless of course, you employ some tax deferral strategy - which defeats the use of the equity for a college education.

What happens to your tenants? In our example, the real estate is occupied by three businesses - two of which have leases and one that doesn’t. The easy answer is - so long as the tenants with leases continue to pay their rent and abide by the terms of their contract - no interruption in their occupancy occurs. Assumed is the role of landlord by the new owner. Simply, he must adhere to the terms and conditions of the lease agreement(s) in place - the rent, term, increases, extension rights, etc. 

A much different story unfolds for the poor dude without a lease, however. You see - he is vulnerable. His rent can be jacked up or he can be asked to vacate. Best case, the new owner allows him to stay and offers a new lease with the same rent he enjoys - highly unlikely in today’s super-charged market.

Gotchas? Sure. Again, the tax man. Upon sale, the real estate is re-assessed for property taxes. Generally, property taxes are re-booted to the selling price. So who pays the increased amount? Yep. Generally, the tenants - assuming of course the leases allow for this “pass-through” - which most commercial leases accommodate. Who cares? Well, you should! You’re strapping your loyal occupants with an increase in their monthly out-flow. Or, short of the “pass-through” provision - the buyer pays you less because he must swallow the new property tax.

Special circumstances? Certainly. Before racing out to the market with that sale package - carefully consider your tenant(s) extension rights - options to renew their leases, ability to take over additional space, or ways to cancel. ALL of these circumstances can affect the value of your building. Did you agree to allow your occupant to buy the building through an option to purchase, a right of first refusal, or a right of first offer? If so - you must follow a protocol tantamount to a NASA launch sequence before openly marketing your holding.

Is your tenant the BEST buyer? Quite possibly. Short of any “rights to buy” you may have granted - the company who pays you rent each month could surprise you - and offer you the most. After all, they “live“ there and have for some time. In many cases, your tenant knows the building better than you do. Faced with a move vs converting their lease to ownership - buying can make sense.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, October 19, 2018

If Commercial Was More Like Residential - 7 Ways From Sunday!


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Commercial real estate professionals differ from our residential colleagues in many ways - which I have enumerated in this space. But, how would our industry change if we adopted some of the practices of our residential brethren? Well, to coin an old phrase - “seven ways from Sunday” - here goes.

We would share our inventory with a Realty Board. Residential agents belong to Boards of Realtors. Many fine things are accomplished with this connection. Houses available for sale are readily accessible through a common multiple listing service. Status - Active, Pending, and Closed - are required of each listing. No such clearinghouse exists for commercial real estate.

We would be more consumer facing. Once a Listing is published through a Realty Board - the information flows to consumer websites such as Realtor.com, Zillow, and Redfin. That transparency enables you to search for a house in your bathrobe - from the comfort of your kitchen table. You can see commercial listings on Loopnet - but the process is flawed, the information incomplete, and the goal is to point you toward a commercial broker for details.

We would track “real metrics”. Because the multiples are consistent - the number of houses on the market, number of houses solid, market time, and new sale escrows - can be tracked and give residential agents a true look at what’s happening. We are forced to react to our “gut feel” for activity or to rely upon global stats such as vacancy factors or absorption.

Our use of technology would be much greater. Wow! This topic alone is column worthy. Commercial professionals have been slow to adopt technology. We are an aging industry stuck with 1980’s methodology. Doubt this? Some in my office still use a Rolodex!

The majority of our deals would be sales not leases. Generally, 8 of 10 deals we do are leases. Our counterparts transact just the opposite - with many residential agents never doing leases.

Most of our transactions would be owner based. Many in the commercial trade only represent occupants. Known as “tenant rep” firms - a specialty is placed upon companies who seek to occupy buildings as owners or tenants. Shunned are assignments which require sourcing a tenant or buyer for a vacant building on behalf of the owner.

Standardization would be encouraged. Boards of Realty have strict codes of conduct and forms for everything. Agents “toe the line” lest they be ousted from the Board and lose access to available inventory. A death sentence of sorts - the potential ouster creates a cooperation among agents and firms.

Friday, October 12, 2018

Where is our BREAD Buttered?

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Today, I will share with you two of the ways I look at my business - the source of transactions and the reasons. Although not terribly scientific - these two metrics can recap where marketing time has been expended - source. And where future deals might lie - reasons. I’m only talking about deals we’ve completed - not our pipeline of future business. And as I’m fond of saying - if it happens once, it’s an exception, twice a trend, and three times an epidemic.

So far this year, our team has completed twenty-three transactions with an aggregate consideration of over $43,000,000. Projected for the balance of the year is an additional $10,000,000 in closed deals.

Sources of Closed business.
Prospecting. That knock on your door or that annoying mailer you receive is probably from me. Yes. I still prospect. Generally, our calling surrounds an initiative - a general trend we see and touches that result or to make neighbors aware of activity - a new availability or a recent sale. 1 deal.

Social media. Linked-in, Facebook, Twitter, and YouTube - are our team’s go-to media sources. We have found consistency, authenticity, and targeted content are the keys to generating visibility. 2 deals.

Sign calls. Folks still drive-around and call us - and we love it! 1 deal.

Referrals from brokers. Our single biggest source of business! These come in two forms - cooperation on a listing or an occupant requirement or a colleague requesting our involvement to secure an assignment. 7 deals.

Referrals from clients. If you do a good job - these follow. 2 deals.

Other referrals. Critical to our success is networking with those who talk to business owners yet don’t compete with our services. Our network is filled with CPAs, attorneys, insurance brokers, commercial bankers, and wealth advisors. 6 deals.

Repeat business. Probably the finest validation we receive - when that group calls you years after your deal - to do another deal. 6 deals.

Reasons folks are transacting.
Expansion. As you would expect in a robust economy - close to half our closed transactions were caused by the need for additional space. 10 deals.

Contraction. An emerging trend recently discussed was the utilization of a third party logistics provider. Achieved is the need for less space with minimal disruption to the operation. 2 deals.
Re-allocation of portfolio. Some would suggest we are close to the top. If not, we can see it from here. Consequently, several of our clients have “taken chips off the table” and sold some buildings. 3 deals.

Merger or aquisition. The “Brady Bunch” of business activity causes commercial real estate activity. Period. 2 deals.

Renewals. Many of our clients are disappointed to discover the deficit of available buildings. Worse, their owner understands choices are limited and jacks up their rent. Our involvement results in a win for both sides - vacancy and move avoided. 6 deals.

Allen C. Buchanan is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, October 5, 2018

Is the Commercial Real Estate Market Cooling?

Image Attribution: www.lawyersconveyancing.com.au

In my humble opinion - yes. I read with great interest - in this publication - the residential real estate trends published by my colleagues - Jon Lansner, Leslie Eskildsen, and Jeff Lazerson. For weeks now - we have noticed more houses for sale, a greater supply of un-sold new homes, longer times on the market, and a departure from a seller’s market into a more normal give and take environment.

So what do residential swings have to do with commercial real estate, you may ask? Plenty! You see - what happens residentially portends the haps in my world - generally by 12-18 months. As an example - our residential peers experienced a dip in 2006-2007. The commercial music stopped in 2008. So, if the theory holds - expect a slow-down commercially sometime in late 2019 or early 2020. Full disclosure - I’ve been wrong before. 

Unfortunately, with commercial real estate - our metrics aren’t as defined as they are with houses - such as the number of new homes available, year over year sales, and time on market. We track gross activity, net activity, vacancy rates, and average lease and sale prices - by product category - retail, office, and industrial. Therefore, most commercial real estate professionals rely on a “gut-feel” of where we’re headed in their respective specialties.

So what is my “gut” telling me about our dealings? Indulge me, while I share.

Listings are hanging around longer. Smart owners are meeting the activity - regardless if the interest is below their expectations. As an example - we recently brought to market a beautifully well located building with complete updates and awesome features. Our pricing was aggressively high. Bang! We got two offers right out of the gate - albeit at a significant discount. Fortunately, our seller chose to deal. Those two were the ONLY buyers that emerged.

Folks aren’t making stupid buys. Two years ago - no asking price was too high. Now - establish a nutty ask - crickets!

Renewal activity is healthy. Companies aren’t moving. Traded is a relocation in favor of - “we will just stick around for another two to three years.” Consequently, a shadow market has emerged - which is difficult to track. If a lease is transacted - we can generally discover the terms. With a renewal - not so much - as this deal occurs with an owner and his occupant - without any published availability.

Pent-up demand is waning. In a down market, a new offering is met with a collective yawn. An up market will snatch the same building whenever there is a sniff it may be for sale. Now, when something new hits, we receive a few inquiries and a small percentage result in tours or offers.

The Labor Day bump. Generally - calls, inquiries, and requests to tour all take a hiatus in the summer months. Once the kids are back in school and the calendar adds an “ember” - things heat up. Not this year. Labor Day has passed - right?

Certainly in-exact. But I’m willing to trust my gut. It’s not mislead me to-date.

I’d love to read your comments. What are you experiencing?

Friday, September 28, 2018

Is Commercial Real Estate a Good Investment - Part Deaux

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www.siliconvalleypropertymanagementgroup.com

Last week - in this space - we massaged the merits. Discussed were the reasons why not - a liquidity event, a sale of the business that occupies, a mis-match of risk, a dispute, and finally aging owners.

From last week -

“You’ve achieved a nice portfolio over the years with timely purchases, well-timed trades up, and careful management of the occupancy, income and expenses. But you are tired! Akin to captaining a ketch - tiny tweaks and tightening take time and talent. In order to capture the winds of income - your sails must be trimmed and you must stand watch over the ocean swells of expenses - lest your vessel should capsize. 

Whew! How about we find a nice cozy port - drop anchor - and relax. But, your ports are limited - as we will discuss next week.”

Today - as promised - we continue our voyage with a precise probe of age and its impact on ownership.

Here is the dilemna. Changes occur as we age - aside from a bulging waistline and the need for hearing devices. Our risk tolerance declines plus our patience subsides. No longer are a tenant’s late payments met with a cordial conversation or the request to plunge a toilet tolerated. But there is a problem - most commercial real estate requires management to max the income and someone must fill the vacancies, collect the rents, chase flaky occupants, pay the bills, fix the roof, file the tax returns, etc.

So, if you’re fed up and want to pivot - what are your options?

Exchange into to a less management intense property. Let’s say you own an apartment complex of twenty units. Your income is dependent upon twenty timely rent checks each month. If one loses a job - you wait, or evict and suffer a vacancy. Until the vacancy is vanquished - the top line is in tatters. So, one strategy is to sell the project and move the money into a single tenant investment - a Dollar General or Caliber Collision as examples. Just keep in mind - your management is lessened to nothing but your risk just sky-rocketed - one blip - no more income. Make sure the tenant is solid and the rent sustainable.

Sell and pay the taxes. Uncle Sam and governor Brown will take a nice bite - in some cases half the gain. Great. You’ve now got a chunk of cash you must re-invest and find a decent return - good luck!

Hire a property manager. Keep the buildings but divorce yourself from the day-to-day. You pay a percentage of the gross rents - generally 5-7% - but you pacify the panic El NiƱo portends for that vintage roof.

Craft a creative transfer of ownership. Charitable remainder trusts, deferred sales trusts and the like may be a good option. You exchange the daily aggravation for a fixed return - all very complicated yet legitimate. Strong encouragement is given to seek professional legal and tax advice if a creative transfer is considered.

Friday, September 21, 2018

Is Commercial Real Estate a Good Investment? Five Reasons it’s NOT!

Image Attribution: www.fortunebuilders.com

Seemingly an easy answer - of course it is! However, the more difficult response - for which I will delve today - is it depends.

As we have covered, commercial real estate exists in many varieties - a suite of offices, a manufacturing plant, a distribution warehouse, a retail storefront or big box, finally a residential project of more than four units. Yes. That small apartment complex is considered commercial real estate.

Your ownership is one of - “my business lives there” or “I simply collect the rent from tenants who occupy the spaces”. Today, we will treat both ownership classes the same - after all both are investors - albeit with different objectives.

An investment in commerical real estate garners the benefits of cash flow, long term appreciation, depreciation, treatment as a long term capital gain and the ability to postpone taxes upon sale through the use of a 1031 tax-deferred exchange. But beware - you must also deal with vacancy, flaky tenants, fixing the roof, collecting the rent and paying the bills, obsolescence, roll-over costs, entity tax returns, and broker fees.

So, to the tough query of commercial real estate as an investment - let’s examine several scenarios under which commercial real estate falls under the category of “it depends”.

A liquidity event. This is a fancy way of saying “you must sell”. Reasons for a sale could consume an entire column. But, if the timing of the disposition runs counter to the market - IE a forced sale in 2009 - lost is all of your gain. During that period, we saw values drop 30-50% in a matter of weeks. Be happy you weren’t a seller!

A sale of the business that occupies the building. Owned is your company’s address. Your business is your tenant. You pay yourself rent each month. What could be better? Frankly, nothing. This is a wonderful arrangement many small businesses enjoy in California. However, if you sell the business - you no longer own the “tenant”. Is there a reason your occupant MUST stay in your building? Or will they flee to cheaper environs once the lease expires?

A mis-match of risk. Single payers - such as a Dollar General store or a Caliber Collision Center offer the owner one rent check each month. There-in lies the benefit and the risk. So long as the tenant’s business is vibrant - money flows in to your bank account. A blip - and you’re installing a “For Rent” sign.

A dispute. Divorce, partnership squabbles, or a change in motivation all can occur during the life of an ownership. Unless specially structured - ownership shares are not easily divided - in other words - you cannot simply take your toys and go home.

Aging owners. Wow! Once again - a column worthy topic on its own. Here is a preface. Those greying temples and aching back - stem - not from age - but from the pains of commercial real estate ownership. Told were you in your thirties - “invest in real estate”, young lady. You have. You’ve achieved a nice portfolio over the years with timely purchases, well-timed trades up, and careful management of the occupancy, income and expenses. But you are tired! Akin to captaining a ketch - tiny tweaks and tightening take time and talent. In order to capture the winds of income - your sails must be trimmed and you must stand watch over the ocean swells of expenses - lest your vessel should capsize. Whew! How about we find a nice cozy port - drop anchor - and relax. But, your ports are limited - as we will discuss next week.

Friday, September 14, 2018

Do Asking Prices Matter?

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As a seller of commercial real estate - you’ve typically three goals - to dispose of your property for the most possible dollars, in the shortest period of time, with the fewest contingencies. Simple, right? Yes, very. However, the execution - AKA “the devil’s in the details” is not so easy.

Let’s start with the asking price - shall we? Some would advise the price at which you advertise your sale is irrelevant - especially in this robust market. After all, there are many more buyers than available buildings these days. This argument does have merit - as you want to maximize your proceeds - but with a catch. Therefore, I will introduce three different strategies - and the appurtenant pitfalls.

Strategy one. Inflate the ask to an un-achievable number. You can always lower the price - right? Well, right. Sort of. You don’t want to leave dollars on the table and in an upwardly trending market - every sale is at a level greater than the last. Buyers expect this. But, take too great a leap and several potentials say “no thanks!” If too many react this way - you then must lower to achieve activity. 

Anticipated by the market are further drops in the price. Created is a “let’s wait and see if we can make a better deal” mentality. You burn valuable daylight reaching the market. Meanwhile, purchasers have bought elsewhere. That popping sound you hear is your strategy back-firing!

Strategy two. Market the offering un-priced. We see this employed when the pool of potential purchasers is plentiful - and of a certain genre - IE: institutional investors. Generally, an un-priced offering is packaged with the income, expenses, and due diligence material readily available. Prospects are able to review the leases, put their spin on the market rates and determine if the roof leaks - all before making an offer. This approach generates several proposals - which are vetted.

 Typically, a “best and final” follows the initial offering round and a buyer is chosen. Players in this arena are used to un-priced opportunities and therefore will react positively. Just know, if you’re after a less seasoned buyer - your effort will suffer - as this group is accustomed to a traditional “ask - offer - response” scenario.

Strategy three. Establish a starting point lower than expectations. Our residential counterparts perfected this method. It works like this. The market is X. We publish our amount as X - Y. Buyers beat down your doors and bid up the price well past your go amount. An offer war ensues and you - as the seller - are the benefactor. Just remember, you need lots of interest to make this happen. If one lowly buyer comes along - you risk selling your property at far less than otherwise. 

Also, be aware of the other risk - a buyer wins the proposal scrum - but can’t close at the agreed price. Now, you start all over - albeit with several other potentials anxiously waiting for buyer number one to fail.