Merry Christmas! Here are your CAM Charges

Image Attribution: www.clipart-library.com

This time of year, landlords all over Southern California, present their tenants with a Christmas gift - a bill for operating expenses. Merry Christmas indeed! Also referred to as Common Area Maintenance Charges - CAMs - these lumps of coal disguised as presents - anticipate the cost to operate your location.

So what’s included? Contained within the invoice is an estimate of property taxes, insurance for the structure, and various maintenance line items - such as roof, landscape, air conditioning and so on. Typically, these estimates take into account what’s known and what’s anticipated for next year.

Property taxes. Specifically, property taxes will be known - sort of. Owners receive their property tax bill in October for the last six months of the current year plus the first six months of next year. Yep. You got it. If you receive a bill now for expected charges next year - the last six months of next year are unknown. Confusing? Yes. Since County fiscal years run differently than calendar years - most landlords simply figure a small pop will occur and invoice accordingly. However, if your building sells or if The California Schools and Local Community Funding Act should pass - prepare for a large increase!

Property insurance. Insurance on the structure tends to be fairly easy. Policies are written annually. If the owner of your building and his insurance broker are in synch - not the Boy Band, BTW - these renewals can occur in December - allowing for the owner to allocate accurately.

Maintenance. Other expenses - such as mowing the grass and clearing leaves from your roof - can be predicted through yearly renewable maintenance contracts.

But what’s not included? If your owner hires someone to collect the rents and pay the mortgage - AKA a property manager - most likely this isn’t included in your CAM. Bank charges, depreciation, legal and accounting bills, and debt service are not generally your responsibility.

Major improvements - such as resurfacing the parking lot, changing the storefronts, installing drought tolerant landscape, employing solar panels, or replacing the roof - are afforded special treatment in your lease. Known as capital expenses - significant dollar expenditures - they are normally billed back over a number of years vs a lump sum transfer to a tenant.

Do I pay these? Yes! Companies who rent their business home are bound by lease agreements - unless your landlord has allowed the contract to lapse - at which point a month-to-month relationship exists. Regardless of the term remaining - lease contracts are generally one of two persuasions - a Net or Gross lease. And you pay operating expenses with BOTH.

With a Net - or sometimes called a NNN or Triple Net lease - you commonly pay as you go. Base rent is paid monthly and operating expenses are paid separately as they occur. In other words - property taxes twice a year, insurance once a year, and other maintenance as it happens. Remember - roof, HVAC, and trimming the bushes are all your responsibility - in addition to your rent. Some owners figure it’s easier to simply calculate what their occupants will pay and divide the number by twelve vs relying upon the tenant to pay when due.

With a Gross - or sometimes called a Modified or Full Service Gross lease - your expenses are baked into your base rent. A word of caution here. Some believe a Gross lease limits increases in monthly payments. After all - a base rent bump is specified. But, most Gross leases allow an owner to recapture an increase over your first year’s expense - known as a base year. A double whammy!

Can I dispute the charges? Of course! Typically you have a right to audit the invoice - even requesting specific calculations and back up documentation. Plus, if an owner over or under estimates - there is a reconciliation the following year.

It’s been my honor, dear readers, to converse with you weekly - not weakly hopefully - this year! My best wishes to you and yours for a magical holiday season! Merry Christmas, Happy Hanukkah, and Joyous Kwanzaa to you all and to all a good night!

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.

Is the Stadium Deal a Home Run for the Angels?

www.ocregister.com

An expiring lease, an opt-out clause, an aging building in need of millions in capital improvements, a beloved sports franchise, a negotiating deadline - all under the scrutiny of a wary public - unfolded this week in Anaheim, California as the Los Angeles Angels of Anaheim forged an agreement with the city. The deal is subject to council approval and a vote will be held on December 20th, 2019.

As reported by the Orange County Register on December 5, 2019 - called for is a sale of the roughly 153 acres including the stadium to a partnership which includes the owner of the baseball franchise. The price tag? $325,000,000! Not chump change for sure. But did the city of Anaheim leave runners on base when the game ended?

What follows is this columnist’s take on the merits of the commercial real estate deal.

The facts: Obligated to play through 2029 - unless the Angels opted out of their lease - which they did last year setting up the negotiations this year. Although specific points of the Stadium lease are fuzzy - we know Anaheim contributes a high six figure annual total to a maintenance fund for the venue, receives little in the way of property tax revenue from the parcels, funds the remaining debt of a convention space deal gone bad, benefits from seasonal ticket sales in excess of 2,600,000, and uses the approximately $3,600,000 from the Angels each year to defray the cost of a private public partnership investment for stadium remodeling forged in 1996. Anaheim’s portion was over $20,000,000.

The Net? Approximately $626,000 per year returned to city coffers since 1996 when the renovations were completed. Certainly, the city derives sales tax revenue for merchandise and food sales as well. Dramatic infrastructure improvements were needed - to the tune of $150,000,000 - to enhance the fan experience and continue the draw - thus persuading the Angels to stay.

The valuation. Without getting too deeply into the weeds - a commercial appraisal considers three things in determining value - COMPS, income, and replacement. Additionally you have appraisals occurring to determine fair market value - which is the case with the Stadium - or an appraisal to justify a purchase - which happens when a buyer and seller agree to a price through negotiations. 

With Angel Stadium - my guess is the appraiser leaned heavily upon the income a development could generate as no significant land comps exist and replacing the stadium would be secondary to a development of the entire acreage. 

Therefore - certain assumptions would have been made as to projected rents, density - number of units, product type - office, residential, retail, etc. 

All in. Was it a good deal or an undervalued deal? Depends. Without the Stadium - the site is probably worth more. But, to get to that value would have required severing ties with the Angels, a lengthy bid process, a vacancy, downtime, etc. With the Angels as the buyer - costly stadium upgrades are avoided, a huge boost in property taxes is achieved and a new development can be centered around the Stadium, Artic, Honda Center, etc. 

  

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.

Pitfalls of an Limited Liability Company - AKA 3 Horror Stories of LLC Ownership

Image Attribution: www.vimm.com

In California - the Limited Liability Company or LLC is the most common entity with which commercial real estate is owned. Individuals within an LLC are known as members. Members are governed by an operating agreement which outlines whom within the LLC are authorized to sell, buy, and borrow. Also, percentages of ownership are specified in the case of multiple members. Why an LLC? Because of a multitude tax advantages and liability protection - which are beyond the scope of this column. However, as commercial real estate practitioners we encounter some pretty hairy issues involving LLC ownership.

Waking a Grizzly. Annual fees must be paid to the Franchise Tax Board and tax returns must be filed each year with the state of California. If not, the LLC may be declared inactive. To re-activate an LLC is akin to awakening a hibernating Grizzly. We once experienced an LLC that was formed, owned a parcel of commercial real estate, and was allowed to lapse - for thirty three years! Now the owner wanted to sell but couldn’t. You see the individual - with whom we were dealing - was not the owner because title was vested as the LLC. Therefore - with an inactive LLC - the individual member couldn’t sign a listing engagement, execute a Purchase and Sale Agreement, or transact any business until the past returns were completed and overdue due fees paid. Fortunately, no income had been reported through the LLC - thus no taxes were owed. Therefore, it was a matter of preparing tax returns dating back to 1986 and forking over thirty-three years of filing fees - which now - with interest and penalties - were in the tens of thousands of dollars. Oy vey!

Who’s in the mirror. Frequently, we experience this challenge. An LLC owns a building which is occupied by a business. Even though the entities of ownership may vary - building LLC and business a corporation - the individuals of each entity are synonymous. In a recent case - over time this changed - two of the three members of the building ownership LLC died and the business corporation was sold to the employees. Created was a difference of objectives - the occupying company needed less space or a correspondingly cheap rent. Desired by the LLC - now comprised of four heirs and an original member - was maximum return from the investment. So now what? The LLC sold and the business relocated to a building half the size.

But we are divorced. Sure. But your real estate ownership may not be. In a particularly nasty situation - we were thrust between LLC members - an ex husband and wife. The only remaining joint asset was a piece of commercial real estate once occupied by a business they operated. While still married - the business was sold but the real estate retained - providing a nice cash flow for the couple. When the two divorced - now desired was a sale of the building. Problem was - the divorcees also wanted to defer the taxes which would inure from the sale. The solution was a risky tactic known as a “drop and swap”. Title was changed to tenants-in-common from the LLC. This change in ownership vesting allowed the individual members - divorced husband and wife - to go their own ways. Please seek legal counsel and tax advice before attempting this.

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.

Hunters vs Farmers - a Parody

Image Attribution: www.lobosocial.com

Commercial real estate professionals must be transactional - they must close deals - to survive. However, the pathway toward those deals can be through the transaction treadmill or through fostering long term relationships with owners and occupants of commercial real estate. Today, I vary a bit through a parody that describes the difference between transactional and relational brokers. I hope you enjoy the comparison.

Once upon a time, in a land far away - before the Internet - there lived a buffalo hunter and a seed farmer. Buffalos were plentiful and slow, and would graze for hours on the grassy plains. Because the flat lands were populated by bountiful bison, the seed farmer found very little land on which to plant, cultivate and harvest his crops. Farming subsisted on small hilly plots here and there - unsuitable for grazing. 

Buffalo hunting was easy. These herbivores were huge and habitual. The hunter - without much skill or effort - in a couple of hours - could "harvest" all of the meat, hide, and hooves he and his family could handle. Others were attracted to the bounty. Times were good to be a buffalo hunter! Eventually, the hunting became more difficult, the hunters outnumbered the hunted and buffalo became extinct. Now what?

As the hairy hunted's haunts - the grassy plains - became less populated by the buffalos, the seed farmer found acres of fertile soil from which to extract the Earth's green goodness - crops. Although the growing cycle was long, the work tedious, the benefits and payback uncertain, the seed farmer continued to plant. When the Earth's bonanza was broadcast - the seed farmer was overwhelmed. Seeds beget seeds, the output grew (sorry) and the farmer was able to feed his family forever. 

Searching for new prey, the buffalo hunter happened upon acres of cultivation and decided to become a seed farmer - how tough could it be, right? After all, he was a mighty buffalo hunter. Unfortunately, the buffalo hunter failed at farming. The hunting chops he possessed - sitting around and shooting a large animal - didn't translate well to the skills required for seed farming - patience, perseverance, nurturing, tilling and harvesting.

The buffalo hunter eventually was forced to sell fax machines. Hmmm, how many of those are around today.

So, can you guess which one has a transactional focus vs building relationships?

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.