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.