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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.
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