Do YOU Resemble YOUR Commercial Real Estate Deals?

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I am penning this as I sit in an emergency vet clinic. Our Labradoodle, Hank, ingested some Sago Palm seeds yesterday. What ensued was all manner of Hell as depicted in the Exorcist - vomiting, periods of lethargy, and terror for the owners - my wife and me. Little did we know that Sago Palms are toxic and in many cases fatal to dogs that graze on their walnut sized seed pods. In times past, Hank's snacking choice would have resulted in sure death - but in today's world of veterinary care, he has a chance. For the record, Hank seems fine to me, but we are told liver damage may be in our dog's future - but enough of that.

The scene at the vet this Saturday is a study in humanity - comical! Enrolled are the aging, overweight red head - and her owner with the same diet and stylist, the plastic crated Pomeranian and his plastically enhanced master, and a wide assortment of licking, yapping, sniffing canines, felines and their apologetic tour guides. But with that preamble, what amazes me is HOW MUCH THESE PETS RESEMBLE THEIR OWNERS! Ok, with full disclosure - Hank's rangy gait, highbrowed nature, and stately manner have caused some to opine of our similarity - but I digress.

So, with the premise that dogs are like their owners, does the same relationship exist with you and your CRE deals? I choose to believe so. Indulge me while I provide three quick examples.

One of our top producers has as his client one of the largest home health care providers globally. He is extremely organized - as are his deals. Consistency, his hallmark - the typical transactions with his client, methodically consistent. Slow and steady, his MO - the transactions are plentiful and profitable.

Think about "that guy" whose office appeared on a recent episode of Buried Alive. ALL CRE offices sport one. You want a copy of the May edition of Site Selection - from 1994? - it's there beneath the rubble. This guy's deals are executed in a similar fashion - sloppy, with an awful lot of clutter.

I generally enjoy some complexity in a deal - keeps me motivated and feeling valuable. I can also justify the outrageous fees if I know I've solved a problem, created a winning strategy, or walked the transaction gauntlet with my client un-scathed. Does this make ME complicated? I'll leave that to you to decide.

Look in the mirror. Is that a commercial real estate deal you see?

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.

Options in a Commercial Real Estate Lease

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By definition - an option is a right contained within a commercial lease which allows you to do something as the occupant. Generally, an option enables you to extend the term of your lease, cancel your lease, or purchase the building. Simple! Oh, I wish that were the case. In practice - option language and exercise can be much more complex. Let’s explore a few of the tastier ones - shall we?

Options are personal. If your company has successfully negotiated an option with the owner of your business address - the option is “personal” to only you as the occupant. It cannot be assigned. Consequently, if you’ve a right to buy the building at a number dramatically below market today - prohibited is passing this along to someone else. We’ve seen cases whereby an occupant exercises their purchase right only to quickly flip the property to another. However, there are tax consequences and logistical challenges to this approach. I should also mention - options completely benefit an occupant. An owner derives little if any benefit from their grant.

Strike prices. On the scale of most valuable to least valuable - an option right with a set price is the most attractive. Conversely, an extension with a price at “market” would be a bit better than worthless. A “market” option - an extension which computes the lease rate or sales price at the time of option exercise - is fraught with peril. Unless a specific mechanism is outlined to calculate market rates - left to opinion is the price. Here’s the rub. Let’s say you have a right to to extend your lease for five years at the prevailing market rates. Cool. You signed your lease in 2015. It’s time. But there is a problem. You and your landlord have a different view of the market and reach an impasse. Now what?

Time frames. Typically - an option - whether to extend, purchase or cancel will have clearly defined time frames from which your right may be exercised. IE: no sooner than twelve months or longer than six months before the expiration of your lease term. These periods are sacrosanct! Strict adherence must be observed or your right may be extinguished. So, what happens if you blink and miss the window? Should you start looking for a place to move? Not necessarily. You’ve simply limited your leverage as now you have no “right” to extend. Your owner still may want to keep you in residence - but at terms more favorable to him.

Method of exercise. Options must be exercised in writing by you. Remember that “options are personal” description? Yes. YOU must send a letter to your owner - unless another method - electronic exercise - is specified in your lease agreement. I discussed this issue with a prospect the other day who shared with me a horror story. Let’s call him Al. At Al’s prior location - Al wanted to renew his lease, avoid a costly move, and had an option to do so. Al’s owner paid Al a visit to discuss Al’s intentions. Clearly stated was Al’s desire to stay. Al assumed all was groovy. After all, Al made his pitch directly to the owner. In person! Imagine Al’s surprise when his notice to vacate arrived in the mail a few weeks later. You see, the option was not exercised in writing. Extreme? Maybe. But don’t fall victim.

  

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.

Poverty, Homelessness, and Commercial Real Estate

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Well. This is a tough column for me to write! But one that’s direly needed as the wealth disparity of our county has widened drastically since Orange County became our home in 1988.

The Southern California News Group in conjunction with the SoCal Policy Forum hosted a panel discussion last evening to bring awareness to the issues of poverty and homelessness. Moderating the discussion was Todd Harmonson, Orange County Register Senior Editor. On the dais were four voices of diverse perspectives - Joel Kotkin, a Fellow in Urban Studies at Chapman University; Shelley Hoss, President and CEO of the Orange County Community Foundation; Mary Anne Foo, Founder and Director of the Orange County Asian and Pacific Islander Community Alliance; and Lucy Dunn, CEO of the Orange County Business Council.

Once the orange grove studded bedroom community of Los Angeles - Orange County has sprawled to be 34 disparate cities with a population elevating us to the fourth largest in the United States if counted collectively. No longer are we the Los Angeles employment feeder to the aerospace, textiles, and entertainment industry. The Orange County economy is robust - boasting one of the lowest unemployment percentages in the nation coupled with one of the highest median annual incomes - $89,759. We lead the country in medical device manufacturing, real estate related jobs, construction, and finance. So where’s the issue?

The unemployment numbers are misleading. According to Professor Kotkin, roughly 8 of 10 new jobs created in California since 2010 have been below the median income level of the county. 4 in 10 are below $40,000 annually. These incomes make it difficult to survive as an income of roughly $66,000 is needed to afford the $1800 per month average rent for a two bedroom apartment in the county. Underemployment is rampant as well says Lucy Dunn. A Disneyland ride operator serves as a great job for a high school student learning their chops. Not so much for a head of household supporting a family.

We’ve done a poor job educating our youth. Most of my practice centers around family owned and operated manufacturing and logistics businesses. Ask any of them what their biggest concern is - the lack of skilled employees. Welders, CNC machine operators, and equipment repair technicians are in short supply. Our high schools and community colleges have taken a dim view on vocational training. Look. A four year degree is awesome! But, it’s not for everyone. Especially if it means beginning your career saddled with a load of student debt to service and the inability to find a well paying job. Starling numbers of our educated youth are bailing for progressive states such as Texas, Tennessee, and North Carolina. Sure. The weather is brutal. But, you can enjoy an affordable family home.

Housing starts have woefully lagged employment growth. Lucy Dunn, formerly the Director of the California Department of Housing and Community Development, outlined the metrics. Until recently, our state has added approximately 500,000 new residents each year since 1950. Our need for new housing annually? 200,000 units. We’ve not achieved this since 1989! It doesn’t take a doctorate in economics to realize that’s a huge disparity in supply and demand. Consequently, our median price for a family home has eclipsed $720,000 and average rent for an apartment - $1800 per month.

Our state has not been our friend. I could write an entire column on this subject - maybe I will someday. Suffice it to say - burdensome regulation, crippling taxes, anti growth policies, job killing attitudes, unsustainable public employee pensions, ALL have contributed to the pickle in which we find ourselves.

Is there hope? OF COURSE! We are one the most innovative and entrepreneurial counties in the world. Shelley Hoss pointed out most of the wealth in Orange County is first generation - unlike the East Coast with its seven or eight generations. Additionally, most of our wealth was created here and by folks who benefitted from public education, a scholarship from the Cal State or UC system, or public assistance. Many of our wealthy benefactors emerged from poverty to their current prominence. We are a generous community!

Bravo to the Southern California News Group and SoCal Policy Forum for bringing awareness to our issues and generating a platform from which to converse! 

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.

Events, Events, and More Events

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With a fresh year ahead, many organizations host events in January and February to educate their members and the public on the year behind and trends in front. I was privileged to attend three such gatherings recently - the Council of Supply Chain Management Professionals, the city of Corona Economic Development, and a lunch and learn hosted by Clarion Construction. All three - although widely different in their content - were exceptional! What follows is a brief takeaway from each.

CSCMP. “The Council of Supply Chain Management Professionals(CSCMP) is the leading global association for supply chain management professionals. They have been helping their members and their companies since 1963. Nine thousand members worldwide receive unparalleled networking opportunities, cutting-edge research, and online and on-site professional educational opportunities.”

Focused this time upon career opportunities, culture, scholarship, and networking among the attendees - we were treated to comments by a representative from FedEx, Living Spaces Furniture, and AWESOME. Supply chain management, which was virtually non-existent twenty years ago as a career, a collegiate major, and largely dominated by men now boasts a wide range of jobs, multiple advanced degrees and a diverse base of players.

City of Corona Economic Development. Discussed were Opportunity Zones. Larry Kosmont of Kosmont Companies and Blake Christian from HCVT schooled us on the ups, downs, ins and outs of Opportunity Zones. My hope was a bullet point understanding would result from the time invested. The reality was more confusion than before! OZs - as they are called - contain more mystery than the Wizard of Oz. Follow the yellow brick road indeed! Simply, Opportunity Zones are an effort to spur investment in economically challenged areas by providing capital gain tax deferral. Great in concept. Much more difficult in practice. California claims 879 Opportunity Zones throughout the state with 27 in Orange County and 108 in the IE. Viewed by municipalities as a means to stir business growth - some cities are overlaying OZs with Enhanced Infrastructure Finance Districts (EIFDs). Coupled - investment is encouraged and cities benefit from the incremental property values.

Clarion Construction. “For over a quarter of a century, Clarion Construction, Inc. has provided comprehensive construction services to only one market segment, the cold storage, food manufacturing and food distribution industry.”

Cold storage is an area of the commercial real estate trade that few professionals understand. The session was devoted to education. In attendance were a wide range of industry representatives - property owners, developers, and brokers. Freezer cooler space once housed in centralized warehouses adjacent to grocery story corporate headquarters - cold has expanded regionally and locally as “same day” demand has flourished. Cold is defined as any temperature controlled warehousing from ambient to 40 degrees below zero. Clearly, with each comes nuance. Probably most interesting were the steps needed to insure the ground underneath a building doesn’t freeze. The slab is removed, soil excavated, subterranean piping installed, thermal barriers assembled, and rebar and concrete replaced. Boom! A chamber suitable for Ben and Jerry’s results.

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.