Property Taxes and YOUR Tenancy - PLEASE READ THIS!

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Whether you own and occupy the building from which your business operates - owner occupant - or you lease the premises - tenant - THIS is for you. A proposition may be on the November 3, 2020 ballot that could dramatically increase property taxes for commercial properties.

Property Taxes Currently. As a business owner - you reside in a building - a manufacturing plant, a retail storefront, or a suite of offices. Our state of California taxes those premises in two ways - through a property tax of the land and structures and through a business personal tax which is levied upon fixtures, machinery and equipment used in the operation of your company. Both are currently protected by a constitutional amendment known as Proposition 13. In effect - since 1978 - real property and business property are taxed at 1% of the assessed value and said taxes are limited to a 2% annual increase unless the property is sold - triggering a reassessment at the current market value.

So, if you opted to buy your location in 1980 - and have occupied it since - you’ve benefited from a low taxable basis relative to the market value.

Specifically? Let’s say you own a 20,000 square foot industrial building you purchased for $700,000 in 1980. Assuming a 2% annual increase in taxable assessed value since your purchase in 1980 - your assessed value today is approximately $1,500,000 - resulting in property taxes of close to $15,000 per year. However - the market value for your building is around $4,500,000 which would yield an annual property tax of $45,000 if the parcel was re-assessed at market. Wow! A whopping difference of $30,000 per year.

Property Taxes Proposed. Some say this disparity creates an unfair advantage for certain businesses and a shortfall for state coffers. Authored is the California Schools and Local Community Funding Act of 2018. Under the proposition - which may appear as a ballot initiative on November 3, 2020 - commercial properties will be taxed differently than real estate zoned for residential and agricultural uses. Under the plan - certain commercial properties would be re-assessed every three years and immediately taxed at their current market value. Projected to generate $6-$10 Billion per year - 40% of the windfall is earmarked for schools.

Excluded from the initiative are owner occupied commercial properties with an assessed value of under $3,000,000. If your business employees fewer than 50 workers - good news! Your company is exempt from Business Personal Property taxes on your machinery, equipment and fixtures. Otherwise - a new $500,000 floor is created. You only pay the tax if the value of your machinery, fixtures and equipment exceed this amount.

What does this mean to you? This certainly depends. The examples below model some potential impacts.

Example 1. You lease an office, industrial or retail building and employee fewer than 50 folks. Depending upon the current assessed value of your owner’s building and the terms of your lease - your property taxes may increase but you’ll benefit from the exclusion of your business personal taxes.

Example 2. You lease an office, industrial, or retail building and employee more than 50 workers. Depending upon the current assessed value of your owner’s building and the terms of your lease - your property taxes may increase. You’ll pay business personal property tax on any fixtures, machinery, and equipment with an assessed value greater than $500,000. The initial $500,00 is exempt.

Example 3. You own and occupy a small commercial property - assume $225 per square foot for industrial, $275 for an office building, or $300 for a retail storefront - multiplied by your square footage. If the current assessed value of your real estate is less than $3,000,000 - no re-assessed property tax increase. And - if your headcount is fewer than 50 employees - you’ll also avoid the business personal tax.

Example 4. You own and occupy a 30,000 square foot industrial property. Your product is made of steel and you employee 100 individuals. Unfortunately - you’ll potentially face the perfect storm - your location will be re-assessed and taxed at the current value AND you’ll have to pay Business Personal Property taxes on your fixtures and equipment. You will - however - get a $500,000 exemption for the value of your fixtures, machinery, and equipment.

What should you do? Read the proposition! Seek counsel from a commercial real estate or tax professional on the exact impact to your business situation. Be mindful - of the proposition - when signing a new lease or extending an existing lease. Be vocal in your industry trade groups and social circles.

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.

How to Become a Commercial Real Estate Legend? Simple - These Four Things!

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I am penning this post from a palatial suite - not the font seat of my car, btw - at the Aria in Las Vegas. It's early and I am one of the few that is witnessing the sunrise at the beginning of my day. My company, Lee & Associates, journeys to Las Vegas each fall for our annual Summit. My thoughts drifted to a Summit past - the last one Bill Lee attended.

At that Summit - I re-connected with my old friend - Bill - hint, his name is on the front door. It was so great to see Bill and spend some time with him. Bill, unfortunately has been absent from recent Summits. I REALLY miss him. The cool thing is, it felt as though we talk weekly. He watches my TUESDAY Traffic Tips - my weekly video series - and complimented my work. Bill is LEGENDARY. But, how did he become a legend?

Bill observed a problem. Bill was the top guy at Grubb and Ellis before Nixon was a crook. He was/is the most competitive guy I've ever met. But, Bill realized that intra-office competition was wreaking havoc on the greater good of the office. Bill tells it like this. "I had a 30,000 sf listing. A guy (competitor) in the cube next to me had a 30,000 sf occupant requirement. I didn't tell him about my listing because I didn't want him to get part of the fee. The culture of the office dictated that approach." Bill later realized that the "company" suffered and created a platform, that through profit sharing, rewards cooperation but still encourages competition. This was heady stuff, folks. Talk about disrupting the way in which commercial real estate is brokered. WOW!

Bill had the courage to change. Great, there was a problem. Now, Bill had to convince some fellow brokers that CHANGE was the key to their collective future. Getting brokers to change ANYTHING is tantamount to separating conjoined twins. But, Bill, ever the persuader, convinced a small band of brothers to follow him into the cooperative abyss. John Matus, John Sullivan, Mel Koich, Larry O'Brien, John Vogt, Tom Casey, Dennis Highland, Len Santoro, Bart Pitzer, and Bill's college friend, Al Fabiano heeded the siren call and left the building. 

Bill had a tireless vision. One of the other old timers and I were marveling at how those eleven guys, in an executive suite in El Toro, California, created a company that now boasts 55 offices, close to 1000 agents, Billions in revenue, an International presence, coast to coast visibility, and the BEST place in the world to transact commercial real estate. Period! I asked Bill if he ever, in his wildest dreams, believed the company would someday be this big. He looked at me rather puzzled and said, "of course! Once we got your Orange, California office opened, I knew we were on our way to becoming an international company." Tireless vision!

Bill got out of the way. At a point, Bill realized that for Lee & Associates to grow, he needed to step away and let the eaglet fly. Knowing Bill, as I do, this was warranted but was the toughest thing for him to accomplish. 

Bill along with Craig Coppola, a recent William J. Lee lifetime achievement winner, have authored a book entitled Chasing Excellence, Real Life Stories from the Streets. It is available on line and in book stores.

So, want to become a LEGEND? Just do those four things. Simple, right?

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.

When is a Commercial Real Estate Deal Most Vulnerable?

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Akin to those toddlers who taught me lessons recently - a commercial real estate transaction is born and grows up. In effect, it has a life. Every stage is fraught with vulnerability. It starts as a need for more space, a downsize, a move out of state, a consolidation, or a sale where capital gains must be deferred. The end occurs when the new digs are occupied or the exchange is perfected. What happens in between - navigating the process - is column worthy - and where deals are most fragile.

Determining the need. All commercial real estate deals - leases, purchases, investments - begin with a need. If your company just acquired a competitor - chances are - excess locations must be considered - sold, subleased, or occupied. Exponential growth in your revenue may be handled with additional employees, new machinery, or a re-work of your plant’s layout. But - where praytell will the new hires sit if you’re out of space? A deal for another building may be spawned. However, many transactions are squashed at this stage because no move occurs. Another solution arises - additional offices are built in the existing location, new warehouse racking is installed, or a production mezzanine is added.

Deciding on a process. Testing the market of available space will require you to go it alone or engage a commercial real estate professional. If you search Loopnet for what’s available - you may quickly become jaded. The information isn’t as readily available to you as residential data published by Realtor.com or Redfin. Therefore, you’ll need a tour guide - AKA a commercial agent.

Searching. Touring a few vacant buildings may dissuade you from moving. You see - many times “there’s no place like home!” Will a cost savings occur? How about a better efficiency? Double the amount of square footage - is your increased revenue able to handle the bump in rent? Is your purchase down-payment better used in the business vs. buying a building?

Negotiating. Go in too hot - you’ll lose deals. In this owner tilted market - there aren’t that many to lose. If you fail to anticipate the needed time frames for securing financing, achieving city approvals, and checking out the roof, air conditioning, plumbing - and structure accordingly - you’re deal might crater when you request more days.

Executing. Once the paperwork is signed - the fun begins. You must now figure out if you can perform. You’ll have a decent idea - because you will have secured a pre-qualification letter from your bank - and your down payment funds are tucked away in a liquid account. But, unless the seller has provided you with a complete package of due diligence information - Enviro report, building inspection, zoning uses, plans, permits, and operating statements - you must create these reports. Countless deals die on the battlefield of due diligence as something untoward is discovered - the property once housed a landfill, the roof is porous, or the HVAC units are original.

Closing. Once contingencies are waived - a significant deposit is non-refundable. Simply, you cannot walk away without penalty. Do deals die at this stage? Sure - but rarely.

So, when is a commercial real estate deal most vulnerable? The easy answer? Before it closes! However - there is a bit more to dissect - as outlined above.

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

5 Ways to De-Rail Marketing your Commercial Real Estate Vacancy

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These days - available buildings are in short supply. Unlike our residential colleagues - our commercial real estate market is largely owner oriented. We are seeing some changes as available spaces are hanging around a bit longer and buyers are offering more boldly. What follows are five ways you can insure your vacant building stays vacant - regardless of the seller slanted market.

Assuming a buyer will simply discount the purchase price to address deferred maintenance. Let’s imagine your roof needs replacing, HVAC units originated during the Clinton administration - but don’t blow as hard, the exterior needs a swift coat of paint, and the landscape is as overgrown as California’s budget. As a seller - you might opt to forego spending dollars to remedy the issues. There are three flaws to that approach. First, the prospective buyer will ALWAYS estimate the repairs higher than reality - which creates a wrestling match between buyer and seller as to who pays and how much. Second, the buyer may not have the cash necessary to perform the fixes. Remember - most buyers finance purchases. If the price is reduced and the buyer uses his cash as a down payment - where is the repair money? Third, the buyer has a business to run and may not be willing to adopt a “project” of repairing a broken building.

Marketing a building while occupied. At first glance - this may appear to be an owner benefit. After all - the occupant is paying rent while folks are traipsing through. The reality? Tours are tough as arrangements must be made around the tenant’s schedule - which might not jive with the prospect’s. It’s difficult to see the potential - as the space is filled with employees, equipment, inventory and all manner of activity. Another pitfall? If your relationship with the resident has been less than stellar or if the building has some notable shortcomings - don’t expect a glowing review. You may miss the buyer with an immediate need as the space cannot be occupied at the close of escrow.

Not placing the space in “lease-ready” condition. There is a commonly held belief in the commercial real estate profession. What is it you may ask? If your goal is to lease your commercial real estate - the premises must be converted into a “lease-ready” condition. What is lease ready? Offices re-painted and carpeted or left for the tenant to choose the flooring - with a board of flooring choices. Warehouse area painted and cleared of all machinery, equipment, and debris. Restrooms, break room, and common areas deep-cleaned. A prospective tenant must be able to walk-in and immediately imagine his company occupying the space - and not be distracted by the old mini-blinds left over from the previous tenancy.

Harboring a hidden agenda. Does the occupant of the building have any Rights of First Offer, Rights of First Refusal, Options to Buy, Options to Expand or Contract? Has the current tenant found a place to move? Is the marketing effort simply a nudge to persuade said tenant to renew his lease? Only careful questioning will uncover the secret. We recently proposed on an offering only to discover the tenant had a right to buy the building. Fortunately, the right was relinquished and our folks got the deal. But, days were wasted while the right was vetted.

Allowing a buyer to know more than the seller knows. A buyer will have a period of time to conduct his due diligence - a fancy way of saying he can walk away if he can’t get financing or dislikes the color of the exterior. Appraisal, Enviro reports, title review, building inspection - including roof, air conditioners, plumbing, electrical - and city conversations about zoning, improvements and proposed use will conclude during the buyer’s contingency period. What will they find? As a seller, you’re not required to know. However, if you are aware of issues and don’t disclose them - you might get a nasty gram from the buyer’s attorney. I counsel sellers to do a bit of pre-work on the building’s condition. This might entail hiring an inspector and budgetary bidding for problems uncovered. Surprises are avoided and sale proceeds are maximized.

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

5 Things our Grandkids Taught me about Commercial Real Estate

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We just finished an awesome but exhausting week with our four - another on the way - grandchildren. We have been blessed with three boys and one little girl - the oldest of whom turns four in September. The youngest - not counting number five who protrudes from Mom’s middle - has yet to walk. Two potty by themselves, mealtimes are messy and eventful, and never were they all in the same mood.

As I reflected on our week together - my thoughts drifted to commercial real estate. Specifically, what did I learn from our self inflicted day care?

The lessons were column worthy. So, here goes.

Youth helps. My wife and I are in our early sixties - prime grand parenting ages but a bit creaky to hoist and tote a thirty pound toddler. Their parents sling them around like sacks of potatoes. Commercial brokerage requires the energy of youth as well. The hours and rejection enjoy a young resilience. Plus, starting from zero each year gets old after a few grey hairs.

Patience prevails. Everything it seems takes longer with someone under four. Lunches were akin to an Elizabethan opera - as long but not quite as tragic. Once we got everyone bathed and dressed - it was time to eat again. Head to the park? Countless stops to check out the lazy lizard sunning himself on the sidewalk or the latest bloom of a bird of paradise. Commercial real estate transactions are endless challenges to our patience also. Rarely does everything proceed as planned. The sooner you learn to embrace the delays the better. You’ll be well served if you learn to pivot.

Creativity counts. Yesterday, we placed two of our boys in the front yard with a cardboard box full of all manner of Mattel. Our hope was a few precious minutes would be salvaged as they experienced the new toys. What we witnessed was quite remarkable. All of the toys found their way out of the box only to be replaced by two giggling little fellas. The box became a cocoon, a “broken” Apollo spacecraft - we watch Apollo 13 with our almost four year old - and a wheelless wagon. Problems abound in commercial real estate transactions. Generally, to solve them you must tax your innovation. Frequently, the solution lies in the problem itself. Simply allow your mind to consider the possibilities.

Urgency rules. Let’s go now - Papa. What better time than today? And why not today? My rule? Treat a commercial real estate process like a game of badminton - return that birdie as quickly as you can to the opposite court. An instant response should follow any client request for information. Don’t postpone until Monday something that can be accomplished on Friday.

Question everything. Our oldest grandson was recently bitten by the “why bug”. You know - why this and why that? Please wash your hands. Why Papa? We’re going to the store. But, why? You know - you’re right! Amazon Prime will deliver our item in an hour. Why waste time driving to a store and waiting in line for an attitude. Sometimes questioning a client’s motivation proves insightful - and his response enlightening. Why do we tour buildings in a certain order? Why must an escrow eclipse a season? Uh oh? Looks like the “why bug” was contagious.

  

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.