How to Approach a Lease Renewal - 6 Suggestions

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One thing that differentiates commercial real estate professionsls from our residential counterparts is leasing. Sure, residential agents can lease houses but most focus upon the higher fees associated with home sales. After all, we are paid a fee on the consideration of a deal - a fancy description of the total dollar amount of the transaction. Lease fees are a percentage of the amount of rent an occupant will pay over the term of their lease. Simply, the variables are rate and number of years. Commercial leases tend to be three to ten years in length whereas a lease for house will be month-to-month or a year. Thus, the short term creates a small amount from which a fee can be earned. Now you understand why home sales are more profitable and residential agents shun leases.

In a given year - a portion of a commercial agent’s income will be derived from completing lease deals. These come in two flavors - new leases and renewals. Yes! In many cases our clients engage us to assist with renewals. Today, I’ll focus on some suggestions as you approach your decision to relocate or renew - akin to “Love it or List it” on HGTV.

Understand your owner’s position. Is the rent that you pay sufficient to cover the owners’s mortgage? Is the building owned free and clear? Is this the only building owned? Can the owner afford a vacancy? What is the nature of the ownership - sophisticated or mom and pop? What are the owner’s plans for the building - hold or sell? All of these variables will play into your ability to craft an acceptable lease renewal. As an example - if your rent barely eclipses the owner’s costs - he may be unwilling to negotiate. Conversely, a building owner with no debt can be more flexible.

Understand your position. In many cases, you know the building better than its owner. After all, your business has lived there for a period of time and weathered roof leaks, air conditioner outages, a shortage of parking, break-ins, and truck access. You reside despite the “warts”. However, if you vacate and another occupant must be found - will the new tenant discount for these deficiencies? What sort of renewal rights - if any - are contained in your lease? Do you have an option to extend? How is the option rent calculated? Finally, has your operation outstripped the capacity of the real estate or are you swimming in excess space?

Know where you are relative to market. Lease rates have increased exponentially over the past five years. If you crafted your agreement prior to 2015 - chances are your rate is dramatically below current levels. Plus, inventory percentages - number of available buildings on the market - are at historic lows. Therefore, if you’re not prepared with this knowledge - you’re in store for a shock!

Calculate your moving costs. Moving companies will gladly visit your site and give you a complimentary estimate of the cost to move your operation. However, don’t forget other relocation variables such as electrical feeds, special permits, downtime, and key employee drive-time. An owner will bank on the disruption and cost of moving your operation in his negotiations - so know your stuff.

Do some math. On your side of the aisle - you have relocation expenses, rent in the new facility, and the goodies that accompany a new lease - free rent, fresh paint, new flooring. But, you’ll pay a market rate for these amenities. On the owner’s ledger will be the expense to replace you - building refurbishment, lost rent from the vacancy, free rent for a new tenant, possibly some special stuff like a new office or two, and transaction fees. Most of these allotments will be “lost forever” - IE: an owner will never recoup them. Many times, the cost of replacing you can amount to 15-25% of the lease consideration - the total amount of rent you’ll pay for the term.

Start early. I cannot stress this enough! Your negotiating strength depends upon it. 12-18 months in advance of your expiration is advisable.

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.

Success in Marriage and Commercial Real Estate - 8 Ways

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My beautiful, and forever youthful bride and I celebrated our fortieth anniversary recently. 40 years! Right? I realize that many of you reading this column aren't 40 years old. In fact our oldest turned 36 a couple of weeks ago. AMAZING! As I reflected on our lives together, it dawned on me that for 35 of those 40 years, I have brokered commercial real estate. What have I learned from my 40 years of matrimonial bliss that applies to commercial real estate? In no particular order - what follows is a list of those things.

Maintain a sense of humor. In marriage and in commercial real estate deals, funny things happen. It is critical to embrace the humor in bizarre situations, smile, and keep on going!

Remain flexible. We make plans and God laughs. Rarely do things proceed exactly on schedule or as anticipated. Flexibility can save your digestive system.

Celebrate the little successes. When you close a deal, pick up the check at the escrow office. When you complete a lease, take the client to lunch or send them a gift basket. We remember the little things in life.

Don't dwell on the failures. It's VERY easy to get bogged down in what DIDN'T happen. Give yourself (depending on the size of the failure) enough time to mourn and then right back on the pony, cowboy.

Transparency is key - even when the subject is uncomfortable. Secrets are the death knell of a relationship or a transaction. Strive to develop client interaction that is candid, selfless, and timely.

You can see the big issues coming - its the little ones that derail you. We do our best to anticipate challenges in a commercial real estate deal - but it's impossible to control ALL of the minuscule details that can affect an outcome. Just like the tortoise - slow and steady makes it work.

You gotta trust your gut. If you sense there is problem, you're probably correct, even if your spouse or client tells you the opposite. See "transparency."

Help your clients achieve their dreams...first. Successful marriages survive when each individual is encouraged and supported to seek their potential. If you will focus upon helping your clients achieve their goals - sometimes at the expense or delay of yours - you will win far more than you lose.

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.

Business with a Boomer - 7 Keys

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Accompanied by my bride - I forayed to the Apple store in the Irvine Spectrum last week. After all, Apple accoutrements are the jewelry of the 2020s. Wow! The modern monolith is maxed with more mobile devices and red shirted millennials than a Kylie Jenner Instagram.

Shopping was proceeding quite swimmingly until we selected our items and method of receipt - email or - wait for the eye roll - paper. With the sizable sale secured - our red shirt directed us to a table which required a 1950’s birth date. Akin to craft time at Leisure World - our “helper” adopted a condescending tone reserved for all need help “restoring from iCloud.” But I digress.

Today, with this experience as a backdrop - I decided to provide a bit of a primer for doing biz with an old timer. So here goes - how to successfully do business with a baby boomer.

We didn't get your email. Don't ask us this question. Instead, use this framework. If something is mission critical, call us, then send a confirming email, then if you haven't received a response, call us again and ask this question - do you have any questions that I can answer on the email I sent you? If you truly want to know if we received your email, set the "received and read" receipt feature to alert you.

When we say we will be there, only a cranial lobotomy will stop us. And when you tell us you will be someplace, you better be hemorrhaging body parts if you stiff us. My favorite is what I call the California RSVP - sure, I'll be there - unless something better comes up. Generally, if you flake, we're done with you, as this is a huge sign of disrespect.

CALL US, we won't be offended. We will actually be impressed that you took the time to dial us up to chat. Remember, we grew up in a time when the ONLY way to communicate, other than face-to face, was by telephone. We are comfortable with the phone and enjoy the interaction.

TIME matters to us. My grandmother used to say - “if you're ten minutes early, you're on time. If you’re on time, you’re late. If you’re late, you’re fired!” The only possible exception would be a party where you are one of a number of guests - then it is a bit clunky to be early. But, in a business setting, we believe it is extraordinarily rude to be late. 

We probably know your boss - or someone who knows your boss. Don't underestimate our networks and the way in which we use them. Chances are we've checked you out, through a common acquaintance, prior to our meeting - and if our dealings aren't the smoothest, we don't hesitate to call your boss and let him/her know.

We respect authority. We therefore have a deep respect for our elders - whether or not they deserve it. Show us the same respect, even if you have to fake it. Like Richard Pryor once opined, "they ain't many old fools. You don't get old bein' no fool. There are lots of young fools and they end up dead.”

A hand written note will win us forever. We were taught gratitude by the greatest generation. Don't forget to thank us, for our time, our advice, our willingness to help, the lesson in how to tie a bow tie, etc. If you really want to WOW us, send us a note - by hand - in an envelope - with a stamp on it! 

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.

Your Business is in Transition - Now What?

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Some commercial real estate transactions - especially involving an occupant buying, selling or leasing - stem from a trigger event. In other words, a change. Simply, the ebbs and flows of economic activity cause a company to re-evaluate its business address.

As I reflect upon the deals I have transacted and what caused them to occur - several situations come to mind:

Last year, three of our import/export clients decided to scrap their expensive warehouse in favor of a third party logistics provider. By doing so, brick and mortar expense and labor costs were saved. Gained was flexibility to meet changing inventory requirements in a “pay as you go” arrangement. However, two of the companies leased their previous spots and one owned. We dealt with the excess with two subleases of the remaining obligations and one move-out and vacant building lease.

Recently, we were engaged for just the opposite. Before, our client shipped his customer’s products directly to the job site - thus eliminating the necessity of storage. Now his customer demanded he stock the items locally for will call. His current operation was maxed. Gotta put ‘em someplace! So, we are in the market for an auxiliary location.

Buying a competitor or selling a business always morphs into space adjustments. Locally, we’ve seen merger and acquisition activity akin to the days of Gordon Gecko. “Greed is good indeed”! 100% of the time - when businesses marry or divorce - redundant real estate results. Now, the Brady Bunch of facilities must be absorbed into one hybrid family. One extreme example - with which we are navigating - involves a manufacturing interest which finds itself with four different parcels - but only needs one.

Occasionally, there is a change in the business owner’s motivation. Retirement, the death of a key employee, a move out of state, or just calling it quits - voluntarily or involuntarily - can portend a different use of commercial real estate or a re-deployment of the building’s equity. Upon the decision to shutter a fifty year old construction company we assisted the owner in selling the old site and re-investing the proceeds into a shiny, fully leased asset that will provide cash flow for years to come.

Let’s not forget a dramatic increase or decrease in sales volume. All manner of accommodation must follow if the current physical plant can’t handle the bump. If on the rise - new equipment and machinery, additional employees, and raw materials must have a place to reside. The counter causes a look at ways to jettison expenses. Yep. One of the biggest liabilities can be rent on a commercial location. A distribution client of ours chose to deal with his increase in business by buying a facility twice the size of his current endeavor. He accomplished two things - space issue solved and no longer does he fund his landlord’s retirement.

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.

Happy New Year! Three 2020 Trends

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2020 is upon us! My wife and I joke - the time between Labor Day and now just flies by - aided of course by Christmas decorations festooning the stores before Halloween. But I digress. By all accounts 2019 was an amazing year! As the year dawned - I was a bit concerned about the trade tiff with China, downward pressure on our economy and the upward push on interest rates. Would there be a slowdown? Well, we certainly appeared to be heading that direction until mid year when BOOM! Interest rates took a tumble and activity skyrocketed. There was a huge uptick in buying and many commercial offices experienced their best months ever - I know our office did. The tepid housing market even caught fire as buyers sensed - now is the time to act!

So what is in store for 2020? Well, they’re just predictions but they are all mine.

Interest rates. The Fed has encouraged the economy with three rate cuts in 2019. But, most of our loan rates are tied to the ten-year Treasuries which rest at around 1.9%. This time last year they hovered closer to 3%. Mid year they touched 1.6%.

According to DAVID PAYNE, Staff Economist for Kiplinger - “The Federal Reserve signaled that it wants to hold off on further interest rate cuts for a while. At its meeting this week, the Fed kept the federal funds rate between 1.5% and 1.75%. Fed Chair Powell expects that the economy has stabilized, but again emphasized that the future path of Fed actions will depend on events. The bond market has also been more sanguine, as rates have changed little over the past two months. The yield curve – the gap between rates on short- and long-term bonds – has maintained its historically normal upward sloping line. This indicates that investors are not worried much about a possible recession occurring next year.”

Overall buying and selling activity. In order for there to be normal transaction volume - we need available spaces coupled with a positive outlook from buyers. In the past three years - our stock of available industrial inventories has steadily declined - bolstered only slightly by a few newly constructed projects. Currently, empty buildings are at an all-time low. At the same time, buyer sentiment remains robust. In other words - we still have plenty of demand but very little supply from which to transact. To me, this translates to higher prices for those vacancies that do hit the market. I am, however, paying close attention to large spaces - in excess of 100,000 square feet. These have been the darlings of developers the past few years as they are cheaper to build. Overall, the vacancy on large boxes is double that of smaller offerings. This could spell some softening in big space pricing.

Election year. Yes! The prospect of a new administration or four more years of entertaining tweets is here. The biggest predictor - in recent elections dating back forty years - on who will be elected has been the health of our economy. Remember the double digit interest rates of the late seventies that spelled the demise of Jimmy Carter? How about the “read my lips, no new taxes” and S&L fueled recession of the early 1990’s. Yep. One term for George H. W. Bush! Historically, as we approach November - an “I’ll wait to see who’s elected” attitude persists. Uncertainty leads to inaction which sends a wave of softness through our business. Once we know for sure who will occupy the White House - companies can plan accordingly.

Regardless. One thing is certain. My wish to you, dear readers, is that 2020 may be your BEST year ever!

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.