Random Commercial Real Estate Advice - This One Appeals to All!

Image Attribution: www.chipalatta.com

If you’re reading this, chances are you have some stake in commercial real estate. Otherwise, you’d be focused upon Mark Wicker’s review of the Laker’s roster. 

What’s unclear is the vantage point from which your interest lies. As an example - our neighbor - Sam (name changed to protect the innocent) - is a retired project manager from a large SoCal general contractor. Expected in our driveway is an instant critique of Sunday’s topic - either Pulitzer worthy or what were you thinking? 

I’ve received notes from many fellow brokers with whom I compete. 

Still, others own or occupy commercial real estate with their companies. 

Finally, there are readers who cash a check each month from the rent said occupants - tenants - pay them.

So this column is for you! All of you - by category of reader.

Sam. Your insights are amazing. Thank you! It means the world to me that you take the time each week to read my missives and instantly deliver an unvarnished review. I wish I possessed your encyclopedic knowledge of construction - and could frame it - no pun intended- in a way our readers would enjoy. I’ll keep trying.

Fellow brokers. The biggest opportunity for new business is with inactive clients. Notice I didn’t call them “past or former” clients. They are inactive because they aren’t currently transacting. But, are you certain? How long since you grabbed coffee or lunch with them. Make it a point this week to call all of them. You’ll be amazed at how much new business will surface.

Owners and Occupants. Chances are these past few years have been your company’s best ever. Good for you! Provided are paychecks for a multitude of Orange County workers. You are the lifeblood of our local economy. If you own and you’ve not taken a moment to value your commercial real estate - please do so. You’ll be astounded. If you lease, please review how much time remains on your contract. That smacking sound you hear is your landlord licking his chops - waiting to double your rent come renewal time. No lease you say? Hmmm. You’re vulnerable. Rent can be jacked. Your building can be sold. All manner of havoc can be created for your tenancy.

Investors. You had it rough from 2009-2012! Vacancy was rampant, tenants were scarce and you made any deal to survive. Now - the proverbial worm has turned. Rents have spiked, values have peaked and you’re approaching a lease expiration with your tenant. Your time - right? Just keep in mind. If you hit your tenant too hard - he may relocate. Cool, you say. I’ll just lease the building at the increased market rent - no problem. Yes, but - re-leasing your building is not free. Downtime, refurbishment, tenant improvements, abated rent, broker’s fees - all diminish the new rate you achieve. Please do this simple exercise. Assume a market rent and term you’ll strike. Total that amount. Then compute the cost to originate the new deal - using the categories above. Subtract cost from total and voila! What remains is the net amount you’ll receive - if your assumptions hold true. Now, compare the net amount with what your existing tenant is willing to pay you to renew. Hmmm. Maybe keeping him is a good idea after all.

Is M & A the Ebola Virus of Small Business?

Image Attribution: www.cio.com

For the last two weeks, we have considered trends permeating the commercial property landscape. We deep dived into third-party logistics providers and discussed a move out of the state of California. 

Today’s topic will complete the trifecta of trends as we tackle the quest for business acquisitions.

My theory - if it happens once - it’s an exception. Twice - a trend. Three or more times - it’s an epidemic. Well, if my theory is true - the pace of mergers and acquisitions is the business equivalent of the Ebola virus!

In a typical week, I contact several dozen small business owners - folks who own and operate manufacturing, distribution and service companies. No kidding - one-quarter of these companies have recently sold, are in merger talks, or are seriously considering the purchase of a competitor. Wow! Contact the CDC and get those vaccinations ready!

So what gives? Why this rampant rush for the exits?

In my experience - the reasons are what follows.

Age of business owners. Let’s face it - we are an aging society. Doubt what I say? Take a look around your neighborhood. How many of your neighbors were born when Eisenhower was president? Yep. Now, give some thought to what your neighbors do for a living. Chances are they manage their own company. If the heir apparent is not living in their basement - and in line to take over - these small business owners face a dilemma. How much longer should I continue to own and operate this company? And, is another 2008 on the horizon. Survey says - “fewer than five years” - now is a perfect time to sell the business and watch Jeopardy re-runs in your PJs.

Time in the cycle. Much like activity in the commercial real estate market ebbs and flows – the motivation for company acquisitions follows a similar pattern. Operations are valued based upon a multiple of their earnings. The greater the multiple – the higher the value. Profitability has returned and we are seeing multiples at all-time highs - which translates into much more worth today than any time in the recent past.

Cheap money. Another factor which has rallied the ravenous appetite for business acquisition is the availability of capital. These dollars must find a home. In general, sought is a domicile with the highest return on investment. In many instances, this is best accomplished with a company purchase.

The impact upon commercial real estate. Housing all of these operations? Yessir - a suite of offices, an industrial building, or a retail storefront - AKA - commercial real estate. In every merger, acquisition, or disposition - the buildings in which the operations are located - must be analyzed, valued, consolidated, leased, sold, retained, or otherwise accommodated. 

Should YOUR Business Exit California?

Image Attribution: www.theminorityreportblog.com

Last week, I framed three trends we are observing. In order, they are the use of 3PLs - third-party logistics providers, an exodus from the state of California, and a rash of mergers and acquisitions - not seen since the days of Gordon Gecko in the movie Wall Street!

Promised was a dissection of each of these weighty trends. As 3PLs were discussed last week - I will devote some time today outlining various considerations for an out-of-state move. M & A are on deck and will be broken down next week.

It seems when a big employer like Toyota heads out of town - there is a collective sigh as thousands of high paying jobs evacuate for the Lone Star State. Yeah, Texas has been the catcher's mitt for the Nolan Ryan fastballs it has received from our mound of companies.

At some level I understand why a global business would consider cheaper environs - after all - its
about the earnings and shareholder value. What's more troubling to me - however - is the departure of many closely held, multi-generational manufacturing and distribution companies. These folks staked their claim in SoCal, took a risk, made a fine business, raised a family, only to leave for Nevada, Texas, Tennessee or elsewhere - the trend is staggering!

I've encountered five companies - within the last month - who have made the move. Five more have a pile of glossy brochures - on their desks -advertising the benefits of Bossier City, Lousiana or Kilgore, Texas. These aren't Toyota - mind you. These are your neighbors! These are normal people - not faceless corporations - who own and occupy industrial buildings in town and who provide paychecks to a local workforce - not the behemoth plants with gigantic payrolls.

Briefly, the reasons I've heard - which motivated the moves - or move consideration were:

Labor. Soon, the minimum wage in California will eclipse $12 per hour in its climb to $15. If an operation is dependent upon minimum wage employees - this increase must come from somewhere - increased business, price bumps to their customers or profit reduction.

Business-friendly environment. Some are simply fed-up with a new regulation, inspection, rule, agency, or attitude that would suggest "we don't want you here!" Henderson, Nevada welcomed - with large fanfare - one of our clients - who employees 75 people.

Compliance. See Business-friendly environment

Taxes. Texas, Washington, Nevada, and Florida have no state income tax. Oregon has no sales tax. The highest bracket in California is 13%. Our counties levy a 7-8% sales tax on purchases. Most pay less than the top bracket and sales tax only occurs when you buy something. However, whatever you pay in state and local taxes becomes a raise if you are making the same salary in a tax-free state.

Commercial real estate. a 50,000 square foot building in North Orange County, California will cost you about $10,000,000 - if you can find one! A 50,000 square foot building in Nashville, Tennessee is $2,000,000 - plus you get expansion acreage for free!

Utilities. Many states heavily subsidize the power expenditures of manufacturers - their cost to produce is cheaper and the savings are shared. Water is plentiful east of the Rockies - thus less expensive. Ever fill your gas tank in Texas? That jingling you hear is the ample change from your five dollar bill. Now multiply that difference for a fleet of delivery trucks!

Cost of living. One of my dear clients just uprooted his entire family and moved to Nevada. They've lived in Orange County for decades. His reasoning was an encapsulation of all of the reasons above - plus - his young family members could afford to buy houses - hmmm.

Three Commercial Real Estate Trends - Part One - 3PLs

Image Attribution: www.distributiondesign.com

One of the cool things about my profession is I rub shoulders with some VERY smart people - small business entrepreneurs, commercial real estate investors, brokers, and trusted advisors in the insurance, wealth advisory, tax, and banking professions.

I believe the imperative is to listen, learn and spot trends.

Lately, three trends have surfaced in my conversations - business exodus from California, mergers and acquisitions, and the use of 3PLs - third-party logistics providers.

As all three topics are meaty, I will dissect one each week for the next three - so stay tuned, dear readers.

Today, we will discuss third-party logistics providers - 3PLs.

What is a 3PL? A third party logistics provider is an outsource for the warehousing function of your business.

Generally, an industrial company makes, ships, or services something - or some combination of the three. Simple, right? As an example, that percolated product you are enjoying while perusing this periodical - yep, beans grown and harvested, manufactured by someone, finished cans stored in a warehouse, shipped to your retailer and delivered to your house - either in your grocery bag or an Amazon van. Imagine, the amount of warehouse space necessary for storing all of that coffee - plus the folks needed to receive the boxes, forklift them around, place them into inventory, access them when ordered, package them up, and ship them out the door - whew! Lots of steps, people, and space.

Now, let's complicate the above with a seasonal ebb and flow of the work. You are committing employees and space - which are largely intractable to a workflow that changes. Said simply - during some parts of the year - workers are idle - yet you are paying them. Worse - your rent - for which you are committed long-term - covers a half-empty warehouse!

Enter the 3PL. All of the receiving, inventorying, material handling, order picking, packaging, and shipping is done for you - at item or pallet pricing and with a shorter time commitment - generally a year at a time. You pay for the space and handling you need without the overhead of a lease, full-time employees, or the appurtenant compliance headaches.

Why are companies using 3PLs? Aside from the reasons above - overhead and flexibility - 99 of every 100 industrial buildings are occupied - a vacancy of 1% - the lowest in history! If you need to expand - and choose to do so by leasing or buying a building - your choices are limited. Let's say your business growth will come from adding a new machine - but you don't have anywhere to put it - because that warehouse racking consumes a portion of the plant. Simply engage a 3PL, outsource your storage and shipping, and bingo! You have just found some space for that new machine. A similar scenario occurs when your expansion is employee driven - but you lack sufficient office space. Clip that warehouse and build a new suite - you're done!

May I Make Changes to a Commercial Lease?

Image Attribution: www.re-nj.com

We just completed a very simple - or so it seemed at the outset - lease transaction on an industrial building in the City of Orange.

Well over half of our deal volume is in leasing and the other portion is sales. Unlike our residential counterparts - leasing is a BIG part of what we do!

So what added the complexity to a straightforward deal? The lease and appurtenant comments by tenant's counsel!

This episode begged the question - can changes be made to a commercial real estate lease? The easy answer is - certainly! Everything in a transaction is negotiable. The more difficult concept is "when" you should request changes to the lease language. That - dear readers - is the subject of today's post.

Recently, I authored a column entitled "Gotcha clauses in a Commercial Lease". At a minimum, you should ensure you have a complete understanding of how your lease addresses these items.

Next, carefully consider a few things.

How badly does my company need the space? You see, the expansion needs of your business can easily trump - sorry - the addition or deletion of a clause in your agreement. In other words - if you are adamant plumbing repairs be the landlord's responsibility - and you lose the space because the owner is unwilling - that could be costlier than unclogging a toilet.

Are there backup suitors willing to snatch your position if you attempt to die on the freeway of lease language? If so, you might want to tap the brakes on the tenor of your language negotiation - lest you end up in a heap on the 405.

How much is the total consideration of your lease? This figure is easily computed. Take the monthly rent multiplied by the annual escalations times the number of years. As an example, if the year one base rent is $10,000 and you've agreed to a rent increase of 3% annually for 3 years - the total consideration is $376,362 - a big amount of money - but an owner may be unwilling to spend attorney dollars changing a standard lease agreement. Conversely, if you're talking about a 15-year lease for $5,000,000 on an owner lease form - an investment in counsel is a good one - for both parties. 

Finally, consider the owner of your building. If the landlord owns numerous square feet of space and is used to change requests - a few minor tweaks may be in order. If you are dealing with a mom and pop who own one building - changes may be more difficult. A multinational owner with millions of square feet will have an arsenal of attorneys ready for an arm wrestle - so lawyer up!