Professional Golf and Commercial Real Estate - Similarities?

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As I pen this - one round of the 2019 United States Open is in the books with three rounds to play. Several players hold a share of the lead. It’s anyone’s tournament. By the time you read this - a winner will be crowned. We will be marveling at Brooks Koepka’s dominance of major championships over the past three years or wondering - “who the heck is that guy?” - as the Open will occasionally reward a journeyman - IE: Lou Graham - told you.

As I consumed the first round - my thoughts naturally compared my profession - commercial real estate - with professional golf. Are there similarities? Certainly! Indulge me while I dissect a few.

No safety net. Professional golf is the only pro sport without contracts - much less guaranteed contracts! That whopper agreement Mike Trout signed with the Angels? Yep. Guaranteed. Certainly touring pros have their cards - which allow them to enter certain tournaments - but if you don’t play well - no paycheck! Our profession is a commission only gig. No deals. No money.

Staying power is crucial. Some PGA players break onto the scene and place in the money immediately. Others labor at their craft for years with little to show. Same with brokerage. Many times what separates success from failure is your ability to stick around. Expenses are not covered in professional golf - travel, meals, lodging, caddie fees are all paid by the golfer. A similar accounting occurs with us. Frugality is common with newbies in both professions.

Talent is a predictor but not a guarantee. Both professions boast “can’t miss” prospects - who fizzle akin to that Fourth of July dud. Ever heard of Ty Tryon? Didn’t think so. Young Tryon was to be the next Jack Nicklaus with a stellar college pedigree and comparable golf swing. Never a whimper. The attrition rate with new hires in commercial real estate is 70%. Wow! Only 3 of 10 will make it. Generally work ethic - not talent - predicts success in both fields.

Authenticity. ArnoldPalmer, Lee Trevino, Payne Stewart. All had their unique ways of doing things. Palmer attacked a golf ball like it was a blacksmith’s anvil. Trevino would talk you to death. Payne Stewart? Knickers and knee high argyles in a world of Amana visors. Among them - sixteen major championships! Figuring out a bold new way to schlep buildings works as well.

We start from zero. Every January both endeavors wipe the slates - and earnings - from the previous year. A new round commences. If profitable - the only one who remembers is Uncle Sam.

Well, it’s almost time for the second round. I’ll be watching - on my phone - as I tour buildings.

A New Development

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One of the perks of my veteran status in the commercial real estate wars is I occasionally get to share my knowledge with a new person in the business. One such conversation occurred this week - which I believed to be column worthy. “How is a development deal underwritten?”

Following are the considerations:

Land. A new project requires buildable land. Duh! However, the land doesn’t have to be undeveloped presently. Specifically, in Orange County, many of the new projects are a re-development of sites containing obsolete buildings - the Boeing campus in Anaheim and the Beckman campus in Fullerton are a couple of examples. Both of these sites were purchased, the old improvements were scraped and beautiful new structures emerged. As we venture east - our likelihood of finding raw, undeveloped land increases. Each site has its own special mix of zoning, city entitlement processing, access, topography, and off-site challenges such as curbs, gutters, streets, utilities, etc. Finally, the land must be owned by a ready, willing, and able seller prepared to meet the market price a developer will pay.

The market demand. What are occupants craving? Generally, a developer must understand the mentality of the folks who will lease or buy the new buildings. As an example - currently in North Orange County - there is a shortage of available industrial buildings between 20,000-50,000 square feet. Coupled with this shortage is an acute demand for this product. Conversely, another category - Regional Mall space - has a glut of availability. So now the developer’s task is to figure out a way to build a project of 20,000-50,000 square foot industrial buildings upon a site as described above.

Income stream. So once the new premises are complete - what is our expectation of rent? This is tricky yet critical - as the development’s viability depends upon this metric. Taken into account must be - recent lease comparables, available stock, and the direction of the market - up or down. As an example - inland there are very few currently existing, vacant buildings 100,000-150,000 square feet for sale. However, the cavalry of new developments is coming as there are several projects under construction.

Cost to produce. Coverage. How many square feet can I build on the site? In simple terms - if the site is one acre (43,560 square feet) and I can construct 20,000 square feet - my coverage is 46%. Why is this important? Because all the cost categories follow. If we pay $50 per square foot for the land - a total of $2,178,000 - we must now divide by the coverage in order to determine our land cost “under building”. $50 per square foot divided by 46% equals $108.69 - which is the land cost component attributable to the building. We now must layer in construction costs plus “soft costs” - things like interest carry - remember we have some time before the structures are finished. Now - based upon what we paid for the land and our estimate of construction and soft costs - we have an idea what our building will cost us to produce.

Exit strategy. Even though this item was left until last - it’s actually the first consideration in any development or investment deal. What’s the end game? Do I plan to lease the buildings and hold them as a long term investment? Or should I simply sell them vacant upon their completion and pocket the proceeds - less of course Uncle Sam’s, and Cousin Gavin’s taste. I could lease the product and then sell the income stream as a leased investment. Regardless of the exit strategy - each has its own risk, reward, and profit potential.

So, in its simplest terms -there you have it. Development 101.

Disclaimer - development may be hazardous you your health and may cause extreme anxiety, heart palpitations, hair loss, rapid aging and is not for the faint of heart. Proceed with extreme caution.

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

Problems. Deal with Them!

“Solve all the problems or you won’t get paid!” Sage words from my mentor in 1984. Problems. Every deal has them - to the point if something is going too smoothly - you get a nagging feeling the apocalypse is brewing - just wait. I learned early in my career to expect issues as necessary in any business transaction.

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Some of my faves. A buyer and seller who manage to entrench themselves exactly 6% apart on the purchase price. Does 6% ring any bells? Yep. The amount of most real estate fees. An owner who refuses to approve a sublease because of the proposed use of the premises. A gaping hole in a parking lot during escrow - the buyer was convinced the site was a former landfill. A buyer 350 miles away and a document that needed his signature immediately - lest the time sensitive close couldn’t occur. A seller headed out of the country for three weeks - who insisted upon meeting with the buyer before departure.

I keep my sanity by recognizing there are five universal truths. 1. Problems are a fact. 2. There are two types - those that have and those that will occur. 3. Problems are the beginning and not the end. 4. ALL transactional problems can be solved. 5. Often the solution is rooted in the problem itself.

A word about the Code Blue Team. You know - that group of individuals - hair on fire - that race in with all manner of paraphernalia to save a patient who has coded. You need an advisory panel who can look at your situation objectively. This could be one person - your spouse or business partner. Or several people - from inside or outside your firm. If a tough knot is encountered - summon your team and follow the seven steps below.

So what should you do? Five things. 1. Embrace the problem. 2. Separate yourself from the emotion - this can take some time. 3. Pray about the solution. 4. Engage a code blue team. 5. Employ a seven step problem solving strategy.

Here’s how the strategy works.

Clearly identify the issue. Often our inability to find a solution lies with an improper definition. We recently got tangled up trying to resolve one problem. The real was - we weren’t dealing with the ultimate decision maker.

Understand everyone’s interest. With your code blue team - allow each member to ask as many questions as necessary to gain a complete understanding of the problem. Warning - this is not to offer solutions but to highlight the various stake holders, share holders, influencers, etc.

List possible solutions. Regardless of how unrealistic and with no judgements as to viability.

Select an option. You’re now ready to choose a course and go.

Deliver and document. Outline the proposed solution in writing.

Evaluate. How’d we do and how to we prevent forest fires in the future?

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

The REAL Differences Between Texas and California

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A great deal has been published recently about the business environment the Golden State of California offers vs. the "streets are paved with gold" Texas affords. Texas Governor Abbott has amassed more frequent flier miles traveling to California to poach our businesses than former California Governor Brown has traveling to the moon! The coup de grace? Toyota relocating to Plano, Texas from Torrance, California - along with 4000 good paying jobs. Therefore - I thought it was time to list the REAL differences between Texas and California. Indulge me and I will highlight the differences.

In addition to being on the McKinney, Texas Economic Development team’s speed dial - I actually was born in Texas - spent my formative years in a neighboring state - right across the state line in Texarkana - and still have family and friends there I visit quite frequently. ALL of this qualifies me as some sort of a Texas expert!

We can wax philosophically about taxes, cost of living, regulation, incentives, quality of life, taxes (yep mentioned it twice), etc. But no one writes about the REAL differences between the two states.

OK, here is what you paid for:

In Texas people ride bulls, in California we catch waves.

Texas has three types of venomous snakes, California has the Real Housewives of OC.

In Texas “y’all” addresses one or more, In California it’s “like totally”.

In Texas fish is deep fried prior to consumption, in California we eat sushi.

In Texas the energy trade is the "awl bidness", in California it is the petro-chemical industry - and generally conducted on shore.

In Texas an RSVP means you show up unless mortally wounded, in California an RSVP suggests you'll be there absent a better invitation.

"America's Team" resides in Texas, in California - well never mind. 

In Texas college football they gig 'em and hook 'em, in California everyone gets a trophy.

In Texas they won’t trust you unless they trusted your grandpa, what matters in California is the size of grandpa’s trust.

In Texas the tallest mountain is bio-degradable, in California we make snow.

Texas has WhataBurger, California has In N Out - I know, I know, Texas has 'em too - but its a SoCal tradition

Texas adds cheese to refried beans and it’s Tex Mex, California adds avocado and it’s extra

Texas has Allen's (no relation) boots, California has Rainbows

Texas has humidity, heat, cold, bugs, hurricanes, wind sheer, tornadoes, sleet, snow, thunder, lightening, and floods, California has the marine layer

In Texas you're welcomed with a "howdy" and left with a "y'all come back now, ya hear!" In California - all greetings include “dude!”

If you ask directions in Texas, you get something like - "well, you know where old Mr. Oliver used to live? Well, when you get to his house - I never met the Yankees that moved in ten years ago, from California, I believe - you turn left and go to the vacant Piggly Wiggly - or was it an A&P? - and then I think its right" - In California it’s "take the 405 to the 710 to the 10 toward the city and off at Melrose - no wait, take the 5 and off at Valencia and then all the way on Melrose. 

So if you’re moving to Texas, remember to ask SIRI for directions or you may end up in Hollywood.

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