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

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.

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

Is the Commercial Real Estate Market Cooling?

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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?