Subleases - What Causes Them?

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Penning this in the final month of 2020 - my thoughts consider 2021 and what might be coming. I suspect, a tremendous amount of “shadow space” better known as subleases will fill the landscape of office and retail availabilities next year as occupants adjust to the realities of the pandemic economy. Sure. We could also see industrial overruns - but for very different reasons. 

A bit of context to begin. Commercial real estate is occupied by the building’s owner, also known as an owner occupant or by an entity unrelated to the title holder - a tenant. In the case of the latter, a contract exists. Leases, rental agreements, or the like state the terms of the relationship - monthly amount paid, number of years, responsibility for maintenance, and who pays the property taxes and building insurance. When a change occurs during the term of the lease - causing a shift in the real estate requirement - one result is sublease space. 

So, with that general background, allow me to explain excess square footage and specifically what causes it with office spaces, retail storefronts, and industrial boxes. 

In our first example, let’s take your local attorney’s office. Generally, these counselors lease their spaces. Ok. Some take advantage of the benefits of owning their locations...but play along with me. Assume at the beginning of 2021; three years remained on a five year lease the firm signed in 2019. Once “stay at home” orders took effect in mid-March - the group found itself with most of its practitioners working from home - and loving it! Now, that marble floored and mahogany paneled boardroom is rarely used. The plethora of private offices - which are typical - now lay fallow. However, rent payments are still owed. Decision time. Is the under utilization permanent - meaning a need for a smaller footprint? Or, will full staffing exist soon? In the former - you have the classic need to find an occupant willing to morph into the vacant seats and fulfill the law firm’s remaining obligation - a sublease. 

Another situation - which floods the sublease market - is observed at virtually - sorry - every regional mall, power center, strip, and freestanding big box retailer in SoCal. Pier One, Steinmart, Bed Bath and Beyond, JC Penney, Brooks Brothers, Forever 21 and other name brand outlets all took their lumps this year. Many shut their doors for good. Others are surviving - but just barely. In every business failure, leases must be considered. Some are abandoned through bankruptcy courts. Select ones leave vast, vacant, dark holes where vitality previously existed. Low cost providers such as Tuesday Morning take over. Although, for how long? Creative solutions emerge such as the Union Marketplace in Tustin’s District - a former Border’s Book Store. There, the larger space was chopped into smaller experiential retailers. But suffice to say - leases must be consumed. 

Finally, industrial buildings. You know, those concrete behemoths which house a variety of manufacturing, warehousing, and service concerns. A very different dynamic will create vacancy in 2021 - companies outgrowing their spaces. With the spate of on-line shopping - ECom providers cannot keep enough stock on hand. Food producers are slammed. Any company manufacturing repair and replacement parts is thriving. Try getting a plumber out to fix a leaky toilet at your home or business - good luck! One of our clients distributes mufflers. With the number of folks staying home and extra $$ piling up because they can’t go to Disneyland or the movies - yep. They’re fixing their cars. A building conversation faces them next year. They’ve eclipsed their capacity. Another is also an automotive distributor. Recently, their demand was so great they opted to double their square footage and find someone to sublease the building they vacated. 

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.blogspot.com.

What to Expect in 2021

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Wow! December. With Christmas lights festooning the neighborhood - we are reminded 2020 is almost history! 2021 is a mere 30 days hence. What can we expect of the commercial real estate landscape next year? Someone famous once opined - “well, they’re only predictions, but they’re all mine.” So please bear with me as I get my Nostradamus on.

Bullish industrial owners. We represent an importer. Warehoused are goods they distribute. He’s slammed for space - thus our engagement to find more. Recently our full priced offer was met with a reluctance - by the owner - to grant a financing contingency. I’ve seen this with investment properties - but never with owner occupied real estate. You see, time is needed for a lender to nod yay or nay. Very few occupants have idle cash sitting in an account awaiting a purchase.

Shorter leases. Until the aroma of economic uncertainly ceases to waft, expect occupants to seek commitments of fewer years than before. Ten year leases will become five and so on.

Clarity in the office market. I suspect by this time next year - the runway will be clear and office occupants will have a direction - up or down. As previously mentioned, uncertainty is a killer for any business trying to gauge a need for space. But, as we are seeing in retail storefronts with their downward trajectory - at least we can plan.

Low interest rates. The Biden administration will most likely be gridlocked by a Republican senate. With the house near balanced, a Democrat in the White House and a red senate - expect the Federal Reserve to keep interest rates low. Our ten year treasuries - a bellwether for commercial real estate loans - are expected to wallow at historic bottoms as well.

Burgeoning ECommerce. If the Buchanan household is any indication - internet ordering and “just in time shipments” to your door will continue with a vengeance. Recently, we purchased a new mattress on-line. The next day, two beefy gentlemen ushered it into our upstairs master suite. Will someone kindly develop a box compactor for home use? Something between the kitchen trash masher and the ones in Albertson’s storeroom would be awesome. There’s your million dollar business idea for 2021! You’re welcome.

Continued safety protocols. As the pandemic blossomed in March, predicted were temperature checkpoints, masks, hand washing stations, and distancing. Actually, it was not terribly futuristic. Observed was what other countries were employing. I am startled how quickly we adapted, however. Akin to airline changes post 9.11 - we can’t simply attend a concert, eat in a restaurant, or shop without a face covering. Shocking. Although, expect more in 2021.

An innovative technological offering? Commercial real estate is rarely disrupted by something shiny and new. CoStar - in the mid 1990’s was probably the last big thing. With CoStar’s acquisition of Ten-X this year - we could see a more robust platform from which to transact. At the site’s disposal now is available inventory, what’s recently sold, and an auction template. Hmmm. Where do brokers fit in? But, look no further than our residential counterparts to get a glimpse. Matterport tours, consumer facing available inventory, and accurate internet loan processing lessen the need for “buy-side” representatives.

Scant industrial vacancy. I see nothing on our immediate horizon that would cause industrial availability to rise. The drivers of increased square footage could be new construction. Nope. Not enough vacant land in the OC to stem demand. Plus, it takes an eternity to get a new development entitled. Business failures - probably not. We’ve just endured the greatest health crises in 100 years and many industries thrived. Exodus out of state. Maybe. We’ve definitely seen some movement. However, our local businesses are largely private. They’re your neighbors with a rich history and deep rooted residency in SoCal. A financial meltdown. Yeah. That could do it. 2009 again. I certainly hope not.

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.blogspot.com.

Building Still Vacant? Ask MR BOB!

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You may have consumed my recent column on the acronym N.U.C.L.E.A.R. wherein a discussion took place. You see, I channeled Pat Sajak to create my own Wheel of Fortune. Provided was a fool proof way to analyze the viability of a commercial real estate requirement. I’ll buy a vowel, indeed! The Need, Urgency, Catalyst, Loyalty, Expectation, Authority, and Resources - if reasonable considered - allow buyers, sellers, tenants, and commercial real estate professionals to “qualify” their need and proceed to a successful conclusion. Many contacted me with their own acronyms. One actually from our neighbor, Rudy! I thought them column worthy. So here goes!

Our friends own several properties from which the rent fuels their livelihood. When considering a buy, he and his wife use the acronym C.L.I.P. Condition, Location, Income, and Potential. This simple four quarter system touches all the bases.

Condition. The current repair of the improvements is a very important consideration. Many look at the roof and air conditioning as key components that can require significant investment in the future. However, things such as the parking lot, exterior appearance, plumbing, electrical, and the nature of a property’s office improvements are also key.

Location. Often opined - there are three things that matter in real estate - Location, Location, and Location. Yes! Even if a parcel is the “ugly duckling” of a premier neighborhood - can it one day be the “black swan”?

Income. Unfortunately, this element falls third in line - it belongs first - so that the letters spell something. Otherwise the acronym would be I.C.L.P. - not as compelling or easy to remember. But suffice it to say, the Income is critical! Where is the rent compared to similar buildings? How sustainable is the stream? Sure. You may be looking at a multi-year lease - but if the tenant is gasping for air - you may have to replace the rent sooner than planned. Few properly bake-in the true cost to replace a tenancy. Downtime, concessions, commissions, and improvements all can diminish your future take and should be considered. Remember the condition? Yeah. You’re now competing with other options in the market. Best be spic and span!

Potential. Finally. In addition the the present income - where can you take the property in the future? I refer to this as the exit strategy. Will your family hold on and pass the holding along to your grandkids? Or is the idea to fix it and flip it? Can rents be raised? Will a freshening cause the occupant to renew? Is there excess land from which additional square footage can be added? Maybe the resident is your exit and is a prime candidate to buy. Be quite candid with yourself on this point.

Another really good nemonic came my way last week. This five letter assemblage can explain why your building remains vacant. Want to silence the crickets with the sound of commerce? Run through this list.

Market. If you own a vacant suite of offices - you’re faced with the uncertainty of a Pandemic economy. Virtual work and stay at home orders have created a real dilemma for office occupants. Few know exactly how many square feet they need. Case in point. Our operation in Orange which is tooled for 50 in-house practitioners and staff. We own. We don’t want to relocate into a smaller suite. But, the reality is we don’t presently use all of our space. So, what to do? This conversation is happening in board rooms throughout the country. So with an office vacancy - the market is not your friend.

Rate. Does the rental rate or purchase price you’re asking have any resemblance to the current COMPS? In an up-trending market, you can be bullish - yet realistic. If things are going the other way you easily can “chase the market down” by holding firm.

Building. Is your contruction a warehouse with insufficient ceiling height? How about the corresponding loading? An abundance of office space within a building sans the appurtenant employee parking spots or windows to the outside world is not desirable. Finally, an address meant for manufacturing but without proper electricity will be quickly discounted.

Owner. Take a look in the mirror. Are you a good owner - fair dealer, concerned about the repair and maintenance of your properties, a “big picture” proponent who eschews the little stuff, and avoids extracting the last penny in favor of keeping your parcels rented. If you answered no to any - YOU may be the reason your structure is fallow.

Broker. Finally. How is your vacancy being marketed? Does your representative play nicely with others or is she egocentric and uncooperative. The commercial real estate community is a small one - read. We all know each other! Snakes are avoided. Fortunately, they are few, fortunately! But, the reputation of the person whose sign advertises your offering is paramount.

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.blogspot.com.

We’ve MUCH for Which to be THANKFUL!

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As a craft this column from my garage office exile - my thoughts immediately drift toward today’s date - Friday the 13th? Yes I know, you’re reading this on the Sunday before Thanksgiving - but nonetheless. Historically, a day portending bad luck; but as I gaze to the east at the glorious blue sky - I realize I am a very lucky guy! And speaking of the Season of Thanks - much for which to be thankful. After all, with the Masters tourney resuming play yesterday - what could be better? Sure, our nation has taken its licks this year. But, as proud Americans - we are resilient.

Commercial real estate - depending upon the segment - has been crushed during the year of the Pandemic. But, I believe we are a hearty bunch capable of similar resiliency. Commissioned sales is not for the squeamish. Those of us who’ve survived a few peaks and troughs understand this excruciatingly well.

Please indulge me as I recount a few of the blessings for which I’m grateful this year.

I’m an industrial specialist. As I’ve written ad nauseam, our sector of commercial real estate is en fuego! Manufacturing and logistics spaces have continued to be the darlings. Office space, retail storefronts, and multi-family - not so much. Plus, we generally see a bit of a reset during an election year. Typically, owners and occupants of commercial real estate postpone major decisions on long term commitments until after direction is clear with a new administration. When activity slowed to a trickle this spring and with a contentious election season looming - I braced for impact. We also figured a recession was due because we’d not experienced a downturn since 2009-2010. As economic expansions generally run 7-10 years - and we were approaching 11 - I feared the “perfect storm” was massing. Our office was also at rapt attention. Operating cash was preserved, long term commitments postponed, and staff furloughed. A happy ending was forged for which we are thankful. After a temporary pause in March-May, our demand returned with a vengeance mid-summer. We are on pace for our best year yet!

None of our immediate family has contracted the “Rona”. As a matter of fact, I don’t know anyone locally whose had a bout. Maybe those masks do work. We shuttered our office in mid-March. Only, reopening in August. Many of us still enjoy the freedom of a virtual practice.

Working from home has enhanced relationships. I’m closer to our two year old grandson than any of our other kids and grandkids. Don’t confuse. I love them all equally. But, I’ve been present for over a third of his life. Early on, there was no place to go, I was working from home - wherever I could steal some quiet - so he’s grown up with me there. We’ve both have benefited. Not to mention. Nap time is great! For me - not for him. We shall see how workplaces evolve. I suspect companies will maintain space but with greater flexibility for a virtual workforce and enhanced safety measures.

Despite its warts, America is the greatest country on the planet! This year has been riddled with election mishaps, divisive rhetoric, a departure from civility, and declination of our freedoms during this time of crises. But, we are free to choose how we spend our days. We live in a beautiful place with amazing weather.

It’s DARKEST. Many, many have suffered the loss of loved ones, industry disruption, demolition of the status quo, interruption of gainful employment, the insanity of staying at home while attempting to work and keep little ones engaged in something productive, and face an uncertain future. Yes! All of those and more. But a new dawn is coming. We will emerge better than before. I guarantee it! What can we expect from owners and occupants of commercial real estate in 2021. That, dear readers, you’ll be thankful to read next month.

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.blogspot.com.

Go N.U.C.L.E.A.R. on Your Requirement

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Some of you reading this column own or lease your business location. Many readers are investors who acquire income properties. Finally, you may make your living in some aspect of commercial real estate - brokerage, lending, escrow, title, or a contracting trade. Today, I will delve into a concept which will help you clearly define your requirement for commercial real estate whether you are a business owner, a commercial real estate investor, or a commercial real estate professional.

Used is the acronym NUCLEAR. The letters stand for Need, Urgency, Catalyst, Loyalty, Expectations, Authority, and Resources. If you are considering leasing or purchasing a location for your entity, making an investment, or representing an occupant or an investor - these seven categories can adequately guide your efforts.

Need. There is an old saying in the contracting trade that goes: “measure twice - cut once.” This old adage can apply to deciphering your space usage. Too often, I meet with companies who have a general idea of their growth but have not completed an analysis - they “cut without measuring”. With available space in critically short supply - spend some time with a material handling specialist or industrial engineer. These pros can zero in on the right square footage.

Urgency. I walked a building last week with a food manufacturing company who just received a Walmart contract. The operation must ramp up significantly in the next 90 days. Clearly this falls into the category of urgent. Maybe you recently sold an income property and have parked the proceeds into a qualified intermediary with the idea of affecting a tax deferred exchange. Certainly, you have two time frames which provide your motivation - 45 days from the close of your escrow and 180 days to re-deploy the money into a like kind investment.

Catalyst. What is causing you to consider market alternatives? Does your lease expire soon? Just get a huge piece of business? Acquired a competitor and now you must meld two cultures?

Loyalty. Trusted advisors can make the process of weighing your options much easier. I always suggest a team. Included should be - a commercial real estate professional, a commercial insurance broker, a business banker, a CPA, a transactional attorney, a material handling specialist, as well as specific subcontractors. If your team is missing a professional - ask for a referral.

Expectations. As recently noted, the inventory for manufacturing and logistics space is in skimpy - therefore property owners are quite bullish. Please make sure you’re not assuming a COVID-19 discount when the indications are otherwise. A close look at recent transactions and current availabilities would be a good place to start.

Authority. Are you the decision-maker? If not, are all the stakeholders and shareholders in sync with your direction? The last thing you want to create is a squabble in the midst of a property search.

Resources. Leasing a building is similar to the way in which you would apply for credit. Let’s say you are looking for a building of 100,000 ft.² with an asking rent of $75,000 per month. Contemplated is a 10 year lease. Simple math would suggest a monthly rental of $75,000 multiplied over 120 months. Therefore, you asking a landlord to extend a $9,000,000 loan to your company. Can the enterprise foot the tab? How can you secure the owner’s risk - enhanced security deposit? Personal guaranty? Get yourself prequalified for financing in the event you are searching for a business home to buy. Your lender will be able to quickly determine your ability to purchase.

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.blogspot.com.

 

Random Commercial Real Estate Thoughts

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One of the very cool things that has occurred amidst our self imposed lockdown is a purge! We have closet space we’ve not seen for years! And the clothes we’ve found - oh my! When will I find time to sport that aqua marine leisure suit? Saturday Night Fever, indeed! With all this stay at home stuff - many are using the time to rid the clutter. Afterall, we are spending more time domiciled. Might as well make it work. Akin to the clutter clearance occurring - today’s column is an effort to clean-house and share with you some random thoughts circling my consciousness. So, without further ado - here goes!

A new administration? This was authored prior to November 3rd - even though you’re reading it afterwards - ahhh, the miracle of the modern press. Do we have a new President? Or, four more years of the Twitterer in Chief? Or, are the election results mired in legality like twenty years ago - Bush v Gore? Regardless, commercial real estate could be impacted. Trump has enacted polices favorable to small business and the real estate they occupy - no one can argue. Pass-through entity tax breaks, reduction in regulations, energy independence, expansion of the Small Business Administration, the CARES Act have all created a robust economy - prior to the Scourge of course. A Biden administration could portend an end to 1031 tax deferred exchanges, higher taxes, more government regulation, more dependence upon renewable energy - solar and wind but a kinder, gentler impact upon the environment. Will interest rates rise? Thus making purchasing a business home less affordable. We shall see. In the alternate scenario of “no decision yet” - uncertainty is the biggest culprit of business expansion - read the need for more commercial space. Doubt what I say? Just consider the virus induced stall currently experienced in office space as companies determine the “right size” for their operation.

1031 Tax Deferred Exchange nuances. Speaking of exchanges - the catalyst of so many commercial real estate sales - I’ve recently discovered a couple of wrinkles worth noting. QuicklyContact to sell, create an accommodator, close the sale, proceeds flow into the accommodator account, 45 days commences for identification, upleg buys need to be made at the earlier of 180 days from the close of your relinquish property of the date when your taxes are filed next year. Simple! However, what happens if you don’t complete the exchange? Well in addition to the tax burden - which is a subject for those with many more letters after their names - ie: CPA or Esq - how about the $$ in the accommodator account. When can the money be returned? It depends. If you don’t identify uplegs - the money can be returned after the 45 day identification period. If you in fact ID offerings you’d like to buy but don’t - the money is returned after the 180 day period. But, what if you ID, and close - thus satisfying the exchange - but have some money left over? Frequently, this occurs through closing credits and prorations. Unfortunately, the proceed remnants are held until after the 180 days as well. 

 Don’t try this at home. Recently, I’ve been asked to advise a couple of occupants who own their company’s location. As mentioned, this is one of the single biggest ways to create generational wealth - own the commercial real estate that houses your operation. But, please. Consult with an attorney or commercial real estate professional before selling or leasing your building to a neighbor, accepting an unsolicited offer to purchase, or selling your company and retaining the commercial real estate under a leaseback provision. Sure. I get it. You’d like to save a few bucks by creating an agreement from Legal Zoom - but the unintended consequences of avoiding counsel to save could end up costing you hundreds of thousands of dollars. Fortunately, both the aforementioned clients engaged us. By the way, our advice - if not too extensive - is complimentary. So it’s a win-win.

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.blogspot.com.

 

Location Advice for Transitioning Companies

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Recently, I described several changes that occur during the life of a family operated business - specifically, manufacturing and logistics interests. These outfits are owned by your neighbors next door and employ millions around the United States. To review - a transition could be; acquiring a competitor, the death of a matriarch, exponential growth, loss of a key customer, sale of the operating unit via stock or asset purchase, or a move out-of-state. Sadly, it could also be the end of the road because of a changing market.

 This week alone - I met with three such companies. Yep! All experiencing a change. Below is the commercial real estate advice I gave them. You see - whenever a transition occurs - a commercial real estate requirement soon follows.

 Better returns out-of-state. In 2014 a family owned aerospace tooling entity was sold and the real estate that housed the company retained. A couple of years later, it was time to sell the buildings. Concern was - the new owner of the business ran the day-to-day differently. Could the rent be replaced if the group bolted? Sale of the real estate and the purchase of three investments through a tax deferred exchange quickly followed. Then, as 2020 dawned, a decision to sell was made on one of three 2016 buys. After all, activity was robust, pricing was at an all time high, and belief was - higher returns and reduced taxes could be garnered out of California. Meanwhile, all of the partners had vacated the Golden State. In addition, there was uncertainty with near term roll over of half the tenancy. And if that wasn’t enough - after launching in February and just in time to receive a great offer - the Novel Coronavirus ravaged the national economy! The buyer paused and then cancelled. After the buyer exited - due to the uncertainty - guidance was sought on which direction was best. We were able to provide clarity, create best in class collateral, and re-launch the offering. Closing happened on time! The net proceeds of the sale allowed a 1031 tax deferred exchange into properties in tax friendly states and with a greater overall return and reduction of risk. The last of the four upleg purchases closed this week.

 Structuring for the future. Maybe one of my favorite stories of owner occupied commercial real estate enjoyed a new chapter this week. Two of my dear manufacturing clients purchased their business home in 1995. In the ensuing twenty-five years exponential appreciation has occurred. By their admission - the address is worth three times the value of the business it houses. Finally, a suitor for the company has gained favor. A sale of the assets may occur soon. The terms and conditions of the leaseback are critical. Potential investors for their real estate holdings will look at the lease rate in comparison to market, the length of the lease, and the maintenance expected of the owner. Even if there is no interest in spinning the parcel today - these issues need discussion.

 Everyone is agreeable - until they aren’t. One of my clients was approached by his neighbor. They struck a handshake deal. Unfortunately - the agreed upon rate, term of lease, and extension rights don’t provide my client with a lot of latitude. He’s bound to dealing with the expanding neighbor if he wants or has to sell - at a pre-determined price and time.

 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.blogspot.com.

 

Position YOUR Purchase Offer for Success! FIVE Ways.

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As previously mentioned - industrial real estate - those buildings geared for manufacturing and logistics warehouse providers, is on fire in Orange County! These are typically constructed out of concrete, located on little known city streets such as Blue Gum, Coronado, Carnegie, and Capricorn, and house companies that make and ship things. But, as the term on fire means different things to different folks not related to our industry - I believe it’s important to offer some context.

2020 - the year of the pandemic is now over 80% complete. Costco has Christmas decorations - and socially distanced Halloween isn’t yet a memory. What? You’ve not yet strung your lights? But, I digress. Since January, 15 sales have occurred - on industrial buildings greater than 50,000 square feet within the 34 Orange County, California cities. These from approximately 868 existing units in this size. Excluded from these statistics are lease transactions - another conversation. But, in 2020, suffice to say - 15 sales, 868 buildings 50,000 sf and larger - 1.7% of the base inventory sold. Wow! Now. How many 50,000+ sale availabilities are there? Care to hazard a guess? If you guessed 5 - you’d be spot on. Viewed another way - only a bit more than 1/2 of a percent (5 available, 868 exist) is ready to receive your offer to buy. To add some historical perspective, during the last pause in the action - 2008-2009 - there were 22 buildings for sale (50,000+) along La Palma Avenue in East Anaheim ALONE! My, my. Look what 10 years of robust growth has done to our stable of sale availabilities!

You may be thinking, so what? What’s caused this and how does this affect my plans to purchase in 2021? The causes are two fold. Increased demand and the lowest borrowing rates in decades - maybe ever! If your plans include testing the sale market in 2021 - please be prepared for pitiful supply, intense competition, multiple offers, and lenders that scrutinize every debit. Please don’t enter the fray unprepared for the environment that exists in today’s sale market. Sure. You can consult with your banker and get pre-qualified - a MUST. Maybe now is the time to wait - after all, can this overheated frenzy last for years? Leasing for a period of time until the fever ends might work out well. If you’re adamant about buying - have you considered these things?

Your Representative. Recently, we found ourselves in competition for a site. Our buyers were well qualified and motivated. But, akin to straight A+ students competing for limited grad school spots - ALL of the buyers were well qualified and motivated. We won the deal based upon a twenty-five year relationship we had with the seller’s broker. He knew us, trusted our word, and advocated for our buyer with his seller.

Your Story. In today’s sale arena - the back story is critical. We came in second last week. Second is first loser and doesn’t pay very well in commercial real estate brokerage. Why, you may ask? We got “out storied”! Sure, I crafted the reasoning for pursuing the building along with our track record of successful purchases with this buyer. What won the day? The neighbor. It seems he’s been trying to buy the building forever. Tough to compete.

Your Differentiator. We were honored to represent a family last month in their purchase of an income property. They didn’t need financing. Proceeds were in the bank awaiting the right deal. Short due diligence and a quick close could be accomplished. Tack on - we were prepared to offer asking price and no one could touch us.

Intangibles. In the previous examples - intangible factors existed - a twenty five year relationship, the neighbor as the buyer, and tax deferred exchange motivated capital. If you dig deeply into why one buyer was chosen over another - in many cases an intangible is the reason. Sometimes it boils down to a gut feel. Trust those!

Other Directions. What alternatives are available with a lease? Maybe a short term with an option to buy may be structured. How about adjacent states of Nevada, Arizona, or Oregon? We’ve witnessed several occupants exodus California in favor of a tax friendlier area. Buildings are cheaper in some of our inland markets such as Riverside and San Bernardino counties - although the gap is narrowing. Could you shorten a contingency period? How about paying cash today and refinancing later? Factors like these can give you an advantage.

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.blogspot.com.

 

Commercial Real Estate Marketing Reports

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Some of you reading this own a company which occupies a building you also own. Others are involved in some facet of the commercial real estate profession - a broker, lender, architect, escrow holder, title officer, or contractor. Still others might own a strip center, office building, or small industrial condo from which you derive monthly rent to supplement your income - hi, Rudy. Regardless of your angle - you’ve been on the receiving end - or have prepared - a marketing report. You see, when a vacancy occurs, a broker is hired to find a tenant or buyer for said vacancy. This, of course, unless you choose to go it alone - which I strongly discourage - but I digress.

What information should expect from your broker in the report? That is the subject of today’s column. I generally like to update I three specific areas. Akin to a microscope zooming in - my reports start with the overall market conditions and zero in to specific recommendations for the assignment.

 Market Activity. The market in which your vacancy competes should be constantly reviewed by your commercial real estate professional. Let’s say you own an industrial building of 100,000 that is ten years old. How many spaces are available? What are the most recent comps? Speaking of comps - are they mainly sales or leases? What active requirements are circling? Based upon all of these data points - market conditions emerge from which decisions can be made. As an example - if you’re attempting to attract a tenant and the vast majority of recent activity is from buyers - you might consider altering your plan. Conversely, if your asking price eclipses the market sales - you better have some staying power to allow the pricing to catch up. But if you find yourself in a downward trending time - you may wait a very long time.

Active Interest. Who has inquired? Are they kicking tires or is there some motivation to their search? I try very hard to find out specifically which company is represented, what else they are considering, and why our building may or may not work.

Next Steps. Fresh coat of paint? Add an office or two? Freshen the landscape? Lower the pricing? Offer some owner carried financing? Offer something that others can’t - an option to buy as an example. All could appear in the recommendations to an owner of commercial real estate.

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.blogspot.com.

Can 2020 Get ANY Crazier? A Commercial Real Estate Metaphor

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Commercial real estate business as usual - no recessionary storm clouds massing on the horizon. Drought behind us - as we continued a relatively wet winter. Local sports teams finishing strong. The opening of Marvel Land - Avenger’s Campus at Disney’s California Adventure. Summer vacations, kids starting their spring semesters anticipating graduations. June weddings. Breaks in the work schedule to celebrate birthdays, anniversaries and National holidays. Yep. That was our view of things to come in January 2020.

 But, in the ensuing gestation period - 2020 has eclipsed any year in recorded history for weirdness! Pandemic, 208,000 deaths, worst economic recession since the 1930s, upheaval in the streets, absence of civility in our public discourse, hurricanes, wildfires...And just as we believed we’ve seen it all. BOOM! Our President and First Lady - and a host of close encounters - have been stricken by the hidden enemy - Covid-19. I’m not certain 2020 can get any crazier!

 So, is 2020 somehow metaphorical for commercial real estate transactions? Maybe! Indulge me while I develop the conversation a bit more.

 An unexpected turn to the charted plan. Purchasing commercial real estate for your business home remains a great way to build legacy wealth for your family. I speak to many closely held company owners who’ve created an entity to own their acquisition and then leased the purchased real estate to their corporate operation. Some boast, their locations are now worth more than the companies they host. Occasionally, I encounter the opposite - akin to the start of 2020 and what followed. Take, for instance, the aerospace manufacturing group that tooled parts for jetliners. Successfully operating from an owned location, things were peachy. Revenue was growing, the facility met their needs, commercial real estate was appreciating, many were employed, life was grand - until it wasn’t. You see, although the owner of the business and real estate were similar - they were not a mirror image. Upon the untimely death of the founding patriarch - all manner of chaos ensued. Unbeknownst to the business operator - son, title to their company site had been deeded to seven factions with disparate goals. Some wanted money, others needed money, while still others realized absent the building - where would operations continue? Things got very ugly. I’m pleased to report the aerospace firm is happily domiciled in a leased location and the building was sold. Oh that 2020 will end happily as well.

 It really boils down to risk. Our President contracted the virus. It presented - debatably how seriously. Many test positive yet are asymptomatic. Was it a blatant disregard of safety protocols - masks, distancing, sanitizing - by a purported germophobe or simply a random occurrence. The arguments on either side are as numerous as viruses in a petri culture. Suffice it to say - risks were taken. It may end badly. We pray not. Are there ways to minimize risk? Of course! Stay home, follow the guidelines, avoid human contact. Done. Sadly, many adopt a riskier approach - much like driving in and out of the fast lane on the 405 and exceeding the speed limit all while eschewing a safety belt - you’re increasing the odds of a catastrophic outcome. With a commercial real estate - to avoid ALL risk - “mask up” and do this. Buy a building - at a safe social distance, no less - at cheaper than market comparable sales - for cash - no loans. Plan to occupy it with your business. If you don’t own a company that can pay you rent - forget about buying commercial real estate. If you divest yourself of the company - sell the building as well. Pay the taxes. Bank the profit. Done! I’ve just described 3% of commercial real estate owners. The remaining 97% tend to take a bit more risk - albeit for a potentially greater return. Tantamount to playing Twister in a Tsunami - the risk doesn’t have to affect life, limb, or the pursuit of happiness - although some invest that way. Examples of “going without a mask” in commercial real estate might be; borrowing more than the property is worth, buying an unsustainable income stream, investing in a special purpose building. You may end up just fine. There again - you may have to quarantine for 14 days and hope for the best.

 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.blogspot.com.

 

Industrial Deals Soar Amidst the Pandemic?

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As the year of the pandemic 2020 dawned - many in our industry prepared for a continuation of the past nine years - robust leasing and buying from owners and occupants of commercial real estate. Derailed was the market as Covid-19 case positivity, hospitalizations, and death ravaged the globe. In March, commercial real estate largely hit the “pause button”. We collectively held our breath - albeit behind face coverings - awaiting the next wrinkle in our state’s lockdown and business hiatus. June brought encouragement as akin to Rip Van Winkle - our state awakened from its slumber - to a changed world indeed! Commercial real estate activity for manufacturing, logistics, and warehousing outfits returned with a vengeance! Currently, in Orange County, there are fewer buildings available than pre-virus. Amazing! By the way, and as previously noted, space geared for office and retail applications is not experiencing the same froth as industrial.

 So what is going on? Indulge me while I expand the discussion.

Essential businesses. Largely, manufacturing and logistics concerns were deemed essential to our economy. Simply, these businesses continued to operate. As a matter of fact, some never shuttered. Many conducted business as usual - as usual as a masked, sanitized, and temperature checked workforce can be. Construction, aerospace, packaging, food production, plastics, hardware, furniture, etc. all find their homes in industrial buildings. Demand for additional space soared as did revenues because many rely upon machinery to drive sales and complete orders. Additional real estate was needed.

No gray area. Unlike past economic slow downs, the pandemic of 2020 quickly picked it’s winners and losers. Absent from this downturn were companies that simply maintained. This blip found businesses thriving or bankrupt with very few in between. Take for example a group that places adhesive material on tape. With all of the on-line purchases and home delivery in boxes - tape is needed - a lot of tape! How about an operation manufacturing recreational vehicles? An inventory glut in early 2020 quickly evaporated into a shortage as folks sought different ways to vacation. Compare these to the poor guy who formerly catered conventions or provided stages to outdoor concerts. Point made.

Government assistance. The Small Business Administration - SBA, which is a primary loan originator for closely held business real estate purchases - responded to the slow down with two unique incentives. First, any existing Small Business Administration borrower was granted six months of payment forgiveness - not forebeafance, mind you - but forgiveness! New transactions - using SBA funding - that occurred prior to the end of September - received the same loan forgiveness. Spurred was a number of purchases. Remember the CARES act? Contained in the trillion dollar legislation was the Payroll Protection Plan - PPP. Afforded for those maintaining or re-hiring furloughed workers was 75 days of expenses - 60 days for wages and salaries and the balance for “other expenses” such as rent. Did I mention these loans are forgiven? “Ducks on a junebug” describe applicant attitudes toward the “free money”. Sorry! Occasionally my southern roots take hold. Ducks on a junebug is parlance - whenever someone is absolutely on and after something. One of the deals we completed in July was a direct result of PPP money. Received was a $300,000 forgivable loan. Our client used some of the money to defray moving expenses to a new facility. Boom!

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.blogspot.com.

 

What commercial real estate lease terms are normally negotiated?

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In any given year - as a commercial real estate professional - approximately 50 to 85% of our transnational volume is generated from lease originations and lease renewals. The balance occurs with sales. Certainly this is an industry average and the percentages vary based upon an agent’s specific expertise. Simply, if the niche is tenant representation - the deals completed each year will be all leases. Conversely, selling Single Tenant Net Leased (STNL) investments yields all sales. Today, I’d like to delve into some specific terms typically negotiated during a lease transaction. I’ll break these down into new leases and renewals - similar yet different deals.

New deals. As defined - a transaction which involves a relocation from point A to point B. These deals are about half of the lease transactions that occur in a market during a given year. Covered during most negotiations are the following points:

Term of lease. For leased premises fewer than 5000 square feet, we will see 2-3 year terms. As the square footages increase, so do the number of years. For a 100,000+ square foot building, we generally ask for a much longer term - maybe a five year minimum up to ten. The rationale for this is pretty straightforward. Bigger spaces can lay fallow for longer periods of time which is costly. Therefore, owners of large buildings want a secured term for a longer period of time.

Form of lease. Many are unaware that you can ask an owner for a specific form of lease. Standard forms include those produced by the AIR-CRE or the California Association of Realtors. As deal sizes increase we see a preponderance of owner generated leases.

Commencement of lease. The start date of the lease is an important part of any lease negotiations. We try to marry this with the expiration of the existing location. If successful, any sort of double rent payment is avoided.

Possession of the premises. In some cases tenants are given occupancy prior to the commencement of the lease. This is known as “Early Possession”. It’s not uncommon to see early possessions of 30 to 45 days prior to the commencement of the lease.

Lease rate. A critical component of any lease negotiation is the lease rate and monthly rent that will be paid throughout the term. Rent amounts may include the operating expenses - such as property taxes, property insurance, and common area maintenance - also known as an industrial gross lease or an office full service gross lease. An agreement net of these operating expenses which is known as a triple net lease.

Increases in rent. Standard in any multi year lease would be an increase in rent throughout the term. 2 to 3% annually would be found in today’s market place. Rarely do we see changes in lease rates as they occur in the consumer price index - the reason for this is the increases are too difficult to compute.

Tenant improvements. Any sort of office additions, power distribution, changes in the parking, or general cleanup and painting should be clearly outlined in the tenant improvement ask. Most leases provide a warranty for the systems within the building such as air-conditioning, roof, plumbing and other mechanical systems. However, it’s very important to specifically outline the condition with which the building should be left prior to occupancy.

Free or abated rent. In robust times like we’re seeing industrially - free or abated rent would encompass many fewer months than in more difficult economic times. As a landlord’s motivation increases so does the amount of free or abated rent he is willing to consider. Half to one month per year of the term is pretty standard.

Extension rights. What happens at the end of your lease? That question is answered via extension rights. Whether they are a Right of First Refusal to Extend, a Right of First Refusal to take additional space, a Right of First Offer for additional space or some sort of an Option to Extend or Purchase or an option to purchase arrangement - all can be found in the request for an extension right.

Miscellaneous. Many large corporate leases will have opt-out or termination clause within their leases. Some also might include an allowance for moving expenses, a must take provision whereby a tenant agrees to lease a smaller square footage today in return for an absolute agreement to expand into additional square footage in the future.

Lease renewals. The biggest difference between a lease renewal and the origination of a new lease is the tenant is currently in residence and desires to stay. Therefore many of the terms and conditions above or non-applicable. Things such as the miscellaneous category which includes termination rights are probably not included in a lease renewal. Many times free or abated rent are excluded. But the length of term, the lease rate, and in certain cases clean- up or a small allowance for carpet are included within at lease renewal. One word of caution with respect to your renewal - please don’t try this at home! Even if you have a wonderful relationship with your landlord, it’s always best to have representation by a commercial real estate professional who is familiar with market conditions and can advise you accordingly.

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.blogspot.com.

 

In-Box Purge!

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My inbox is full! Today, I will parse through the noise and attempt to make some sense of the questions I receive on a daily basis. Plus purging is good. From cleared clutter to sanitized sanity - here goes.

 Does the Presidential election slow commercial real estate activity? Certainly some small business owners take the political landscape into consideration before making a commitment to lease or purchase buildings. Specifically, how does the current administration deal with ownership? Are there tax breaks if you occupy your business home? What about borrowing costs? The vast majority of commercial real estate financing is originated through loans either made or guaranteed by the Small Business Administration. Frankly, in the year of the pandemic 2020 - most companies are concerned with their survival. What happens in November appears to be a distant outpost.

 Will office space ever be used as it was pre-virus? Prior to the lockdown - which sent workers scrambling home to find enough internet bandwidth and clear the guest bedroom - the trend in office space was toward more density. Meaning - doing away with fixed walls, creating a more collaborative work environment, fewer private offices, and more employees per square foot. Concepts such as WeWork - executive suites on steroids - became popular. For a small monthly fee, companies can pivot as their space needs morph. Add a few bodies? No problem. Lose a contract? Just downsize next month. The appeal of coding alongside several strangers advanced. Now, decision makers are re-imagining the way their spaces are occupied. Visit my office on a typical day and you’ll find four or five agents bouncing around a vacant suite. Many of us have found working from home advantageous, productive, and efficient. Will I return to the office on a daily basis? Maybe. But taking a work break and watching Frozen II with our two year old grandson has its advantages.

 Is there a “virus discount”? Simply. It depends. As aforementioned - office space is experiencing some uncertainty. Therefore, if you charge out into the leasing market - chances are you’ll find a deal. Retail? Who knows? We are actually witnessing a virus premium in industrial real estate. Our vacancy was historically low at the beginning of 2020. Even the catastrophic nature of a Covid-19 pause has had little impact. I suspect the bump is largely due to cheap borrowing rates.

 Are touring protocols in place - similar to residential? I read with great interest, Leslie Eskildsen’s column last week. Outlined were the hoops required to simply walk through a house prior to buying it. Good grief! No more open houses, safety gear, financial pre-qualifications prior to touring, handy wipes at the beckon, masks. Yet houses are leaving the market at a record pace! We can still tour without much hassle. Sure, masks are required. In the case of a new build - plan on safety vests and hard hats. But, these are a good idea whenever walking a construction site. I showed up at a building in shorts a couple of weeks ago - when the mercury surpassed my patience. You can imagine my embarrassment when my client perused the space alone - long pants required, sorry!

 How is 2021 shaping up? I’d only be guessing. However, I suspect the fourth quarter of this year will portend what’s next. If businesses reopen fully, a vaccine is discovered, and most importantly - confidence returns, we could see a bounce back like no other. Remember, not so long ago, folks were optimistic about a banner 2020. Man. That is SO 2019!

 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.blogspot.com.

 

Proposition 15 - Look into it, Please!

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 First, a bit of context and a brief history lesson. 

“Proposition 13 (officially named the People's Initiative to Limit Property Taxation) is an amendment of the Constitution of California enacted during 1978, by means of the initiative process. The initiative was approved by California voters on June 6, 1978. It was upheld as constitutional by the United States Supreme Court in the case of Nordlinger v. Hahn, 505 U.S. 1 (1992). Proposition 13 is embodied in Article XIII A of the Constitution of the State of California.” Source: Wikipedia.

 Two hallmarks of the amendment are - 1. values of ALL real estate, residential, commercial, or otherwise are fixed at their 1976 levels. Assessed values may increase annually by the rate of inflation not to exceed 2%. Exceptions are for a property which is sold or newly constructed. These are then assessed at their “new” values. 2. Maximum amount of any ad valorem tax on real property cannot exceed 1%. 

This “third rail” of California law has been in place since some of us wore shag haircuts and big-belled Levis. Thank goodness those had shorter shelf lives than the legislation!

Flash forward to now - 2020, the year of the pandemic.

A ballot initiative - Proposition 15 will appear on November 3. You can read the full text of the initiative here. California Proposition 15, Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative (2020) - Ballotpedia

 From the website above - Simply, “a yes vote on Proposition 15 supports this constitutional amendment to require commercial and industrial properties, except those zoned as commercial agriculture, to be taxed based on their market value, rather than their purchase price.”

Ok. I’m with you so far - you may be thinking. I don’t own commercial real estate, schools need our help, so what’s the big deal? Please read on.

Owners of commercial real estate either occupy the buildings they own or rely upon a tenant to pay them monthly. Commercial real estate exists in three main categories - office, retail, and industrial. Office buildings - ranging from high rise towers to two story garden varieties - house your physician, dentist, CPA, wealth advisor, tax attorney, insurance broker, residential real estate agent, homeowner’s association, news organization, non-profit outfit, and many others. Retail - neighborhood shopping, regional malls, power centers, strips, freestanding, big box, automotive - provide purchasing destinations for goods such as your cat’s food, groceries, apparel, and school supplies - or services such as your favorite bar, restaurant, theatre, or gym. Finally, industrial - generally manufacturing, service, or logistics providers - who domicile in concrete boxes. Some notables are aerospace tooling, plastic molding, warehouse distributors, and trucking outfits.

Commercial real estate is EVERYWHERE! Whether you own it or not - your life - employment, consumption, entertainment - is impacted by someone who does.

If Proposition 15 passes - in this author’s opinion - five things are certain to occur.

First, property taxes on commercial real estate will increase. Second, the increased property taxes may be used to fund local communities and schools. Third, owners of commercial real estate will pass along the increased property taxes to those companies that occupy the commercial real estate - read. Tenants. Fourth, tenants - faced with increased costs - will raise the prices of their goods and services to offset the increase. Fifth, you - as the consumer of said goods and services - will pay more.

Please, educate yourself on Proposition 15 and exercise your civic duty and vote.

 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.blogspot.com.

Are 1031 Exchanges at RISK?

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As we have now surpassed Labor Day in the election year of the pandemic 2020 - expect political rhetoric to reach a fever pitch. Sorry. Pun intended. As our nation slowly recovers from business lockdowns, distance learning, storms along the gulf coast, wildfires in California, and upheaval in our streets - and governments respond monetarily to stem the bleeding - expect the next question to be - “how on earth can we possibly pay for all of this?”

 California has proposed a 16.8% marginal tax through AB-1253. Targeted are those who earn more than $5,000,000 annually. Who cares, you may ask. They should pay their fair share. What’s another 3.5% of their income to help the greater good? Consider this, please. Many small business owners could tip this scale and face the extra burden. How long will they remain in California when Nevada, Texas, and Washington have ZERO state income tax? If we export a significant amount of our tax base - who’ll be left to foot the tab?

 Proposition 15 - on the California ballot in November - proposes to split the property tax roll and tax commercial properties differently than residential parcels. I’ve written ad nauseam about where the ultimate bill will be paid. Yep! By you as the consumer of goods and services. You see - if the cost of commercial real estate rents rise through an increase in property taxes - businesses who occupy the industrial buildings, office space, and retail storefronts will be forced to pass that expense along to their customers - you.

 A target for a significant tax grab could also be the way in which capital gains taxes are deferred through 1031 exchanges. I’ve not seen any storms massing on the eastern horizon - but it’s always calmest - so the saying goes.

 Congress could propose an elimination of this “loophole” and generate billions in tax revenue. It currently works like thus. If you sell a piece of income property - you are allowed to defer your long term capital gains taxes. Simply, you enter a contract to sell, create a qualified intermediary before you close, close, net sale proceeds go into an accommodator account, you identify upleg purchases within 45 days from close, and buy the upleg(s) at the earlier of 180 days from close or the filing date of next year’s tax returns. Easy! Literally thousands of these are done each year. Deferred are Federal long term capital gains of 15-20%, depreciation recapture of 25%, California state taxes on Capital Gains of $13.3%, and 3.8% for the Affordable Care Act. A whopping amount! Assumed is - if we tax those sales today vs allowing a deferral - think of the revenue we’d generate!

 Good in theory - but here’s the rub.

 When I visit with owners of commercial real estate about the likelihood of selling their property - I’m asked this question. If I sell, what will I do with the proceeds? After all - I don’t want to pay close to half my gain in taxes! We then have an in-depth conversation about tax deferred exchanges. So if Congress were to change the rules or disallow 1031 exchanges altogether - sellers would be left with very little motivation to sell. 

Some might say - this argument is quite self serving. After all, this guy is paid to sell commercial real estate. True enough. However, please don’t forget the multitude of industries who benefit from the sale and purchase of commercial real estate. Title companies, escrow holders, transactional lawyers, CPAs, qualified intermediaries, lenders, property inspectors, environmental engineers, contractors all drink from the trough of a commercial real estate transaction. Behind the scenes are real people - with families - whose livelihoods depend on property sales.

 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.blogspot.com.

Proposition 15 - Split Roll - Who Pays?

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For the next few weeks, I will endeavor to sound like a broken record. Or is it Groundhog Day? Or as Yogi Bera once opined - “it’s Deja Vu all over again.” Not that I’m partisan - my goal as a commercial real estate practitioner is to inform my readers about the ins and outs of splitting the tax roll. Today - with full permission - I’ve borrowed a review of certain AIR CRE lease documents from Usman Mohammed from Consensus Legal P.C. If you have questions, you can contact 

Usman directly:

Direct: (213) 814-2552

Email: Usman@ConsensusLegal.com

www.ConsensusLegal.com

Many, many small businesses have entered into one of the below AIR CRE leases and are governed by their language.

 A bit about AIR CRE. “AIR CRE is an innovative, member-owned platform that provides commercial real estate professionals with the critical tools they need to be successful. AIR CRE has curated the best resources that the industry has to offer, and packaged them together as a single integrated network. Members have unparalleled access to a system of market research, listings services, contracts and legal resources, networking, and education.”

 So, simply - if a Tenant enters into an AIR CRE lease today, would the Tenant be required to pay the increase in property taxes resulting from the potential passage of Prop. 15?

 Short Answer: Yes, except under the rarely-used AIR CRE month to month lease (entitled “Standard Industrial/Commercial Multi-Tenant Month To Month Lease – Gross”).  

 How does each individual AIR CRE Lease allocate responsibility for increased Real Property Taxes resulting from Prop. 15?  The following is a breakdown.

Industrial/Commercial Leases

Single-Tenant Lease – Gross: Tenant pays increases in Real Property Taxes over the fiscal tax year during which the Commencement Date Occurs. (Paragraph 10.2.)

Single-Tenant Lease – Net: Tenant is responsible for Real Property Taxes. (Paragraph 10.2.)

Multi-Tenant Lease – Gross: Tenant is responsible for Tenant’s share of any increase above the Base Real Property Taxes (i.e., the Real Property Taxes assessed during the calendar year in which the Lease is executed). (Paragraph 4.2(a)(v).)

Multi-Tenant Lease – Net: Tenant pays Tenant’s share of Real Property Taxes. (Paragraph 4.2(a)(v).)

Multi-Tenant Month To Month Lease – Gross: Paragraph 10 provides: “Landlord shall pay any Real Property Taxes.”  In this AIR CRE Lease, Landlord is responsible for all Real Property Taxes.

Land Lease – Gross: Tenant is responsible for increases in Real Property Taxes over the fiscal tax year during which the Commencement Date occurs. (Paragraph 10.2.)

Office Leases

Multi-Tenant Office Lease – Gross: Tenant pays Tenant’s share of the amount by which all Operating Expenses (including Real Property Taxes) for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year. (Paragraph 4.2(a)(v).)

Multi-Tenant Office Lease – Net: Tenant pays Tenant’s share of all Operating Expenses (including Real Property Taxes). (Paragraph 4.2(a)(v).)

Shopping Center Lease

Multi-Tenant Shopping Center Lease – Net: Tenant is responsible for Tenant’s share of all Common Area Operating Expenses (including Real Property Taxes). (Paragraph 4.2(a)(v).)

You, as a Tenant, would be well advised to review your lease carefully. If the heading contains one of those above - you know the impact. If not, seek counsel. If you’re considering entering into a new lease - you are certainly advised to ask for Proposition 15 protection.

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.blogspot.com.

 

Transitions!

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Family owned and operated businesses are the lifeblood of our California economy! I am passionate about helping them create legacy wealth through commercial real estate ownership. One of the coolest things I observe during my daily grind are the many ways Californians make a living. The entrepreneurial spirit is amazing. However, many of our family owned and operated manufacturing and logistics clients are facing a transition in their business which leads to a commercial real estate decision.

 These transitions include:

 Reorganization from Covid upheaval. Sadly, the pandemic has brutally thinned some industries. Others have crushed it. I walked the bulging warehouse with a COO of a family owned and operated business last week. They supply fabric to the likes of Walmart, Joanne’s, and Target. With stay at home orders, more now sew - therefore sales have exploded. Forward looking - their facilities will not handle the uptick in orders. We are exploring ways to minimize their short term pain - a need for more space, now - vs a longer term solution. On the flip side. A client who once supplied lights, video screens, and temporary power to concerts, festivals, and sporting events has no more business. Gone! Just like that. A thriving enterprise evaporated. Our task is more somber as we work through an excess of space and relieving this company of its lease obligations.

 A sale of their operating company or acquiring a competitor. Never since the halcyon days of Gordon Gecko have we seen a spate of mergers and acquisitions like now. Private equity capital - seeking favorable returns - has poured into traditional manufacturing. Plastic injection molding, aerospace tooling, and packaging have found renewed interest from these groups. Common is a “roll up” of these separate operations into a larger entity. Generally, the play is to manage the companies for a few months or years, continue to acquire additional units, shed the unprofitable pieces, and then resell the consolidation. Created - as you can appreciate - is a duplication of facilities - akin to a “yours, mine, and ours” that occurs when a family is blended. Cultures must be morphed, excess real estate shed, and a balance struck.

 Relocation out-of-state. California has made life quite difficult for anyone starting or managing a business. A noose of strangling regulation - licensing, enviro compliance, conditional use permitting, zoning - hangs over new and existing companies. Layer in a few wacky - sorry - new laws such as AB-5 (which unravels the way in which independent contractors are classified), the pending Proposition 15 (if passed, would tax commercial real estate differently than houses), and the new marginal tax rate - highest in the country - and you consider a moving van to tax and regulation friendly stares such as Texas, Nevada, and Arizona. The outmigration is startling yet understandable. Left behind are industrial buildings which must be leased or sold.

 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.blogspot.com.