Is the OFFICE Really Necessary?

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As I craft this column in my re-modeled garage office - don’t pity me, it’s awesome space ! - my thoughts consider the lasting impact of the year of the Pandemic 2020 for commercial real estate. One of the questions I ponder is “how necessary is a physical office location”? And I’m referring to everything from a single story freestanding building - like the one my company owns and occupies in Orange, California - to a suite in a shiny high rise - and all destinations between - mid-rise campus, two-story garden variety, and shared collaborative spaces such as executive suites and WeWork. 

Full disclosure. I specialize in a genre of commercial real estate - industrial - vastly different from the office classes mentioned - folks who make things need a place to do that. Therefore, my opinions are gleaned from my own experience working remotely and those of colleagues - not from market occupants. So with that disclaimer - let’s dive in. Shall we? 

Certainly, in the past, when we’ve witnessed a migration from a home based office to a brick and mortar location - certain triggers emerge. I wrote an entire missive on the subject. If you like, you can read about that here. Location Advice - California Businesses: Relocating a HOME BASED Business to Commercial Real Estate. Simply. Hiring employees, and/or receiving customers generally portends a move. 

However, in the former - with a virtual workplace now firmly rooted - moving from home due to hiring employees isn’t a driver. As an example, my business coach’s organization is corporately located in Cary, North Carolina - in his pool house, no less! Spanning the globe are the group’s coaches. Mine lives in Ocean Springs, Mississippi. We convene bi-monthly via ZOOM - and it works great! 

As to the customer issue. I’m considering hiring a landscape designer based in Portland, Oregon. Yep. He never has to physically visit my property. We had our initial consult virtually. Now, once he’s given the green light - his team will use a combination of Google maps, my measurements, and drawings I have from another project to virtually design our yard. Pretty slick! We will collaborate electronically to phase the project and with our feedback - final product will appear like magic. An aside. What a brilliant business model! He can still design and build in the Pacific Northwest but create concepts for homeowners globally - without ever having to leave the comfort of his basement. 

So, in those two examples - one has built an entire business from a folding table in his carport and the other has expanded his offerings well past the physical bounds of Lake Oswego, Oregon. 

Commercial real estate is a blend. We can see clients at their locations or via FaceTime, ZOOM, or Skype (wow! What happened there?). Our tours of available buildings can be conducted in person or using the same tools - plus drone footage, Matterport walks, VR and the like. For sure. Nothing beats sitting face to face with a client or prospect, perusing her operation, and witnessing short comings of the address. Fortunately, our team was better prepared than some. We’ve spent the past few years evolving so that we could service our clients from anywhere - office, home, project’s lobby, or the front seat of our car. 

Networking has become a challenge. Our chapter of SIOR - dependent upon semi annual conferences and monthly dinners - has morphed into something akin to a birthday celebration with a ninety year old aunt. Yeah. They aren’t happening in person. It is very difficult to mimic the excitement of a Chamber of Commerce lunch, Pro-Visors , or a BNI one-to-one with a potential referral partner. 

One echoing drumbeat is culture. If everyone is not together in the same location - how on earth do you create an atmosphere of - “well, we do it this way”? That dear readers is a topic for another day! 

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.

5 Things to Do in January 2021

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Well. Here we go! 2021. A new babe of a year with tremendous promise, an abundance - hopefully - and a clear path to success. Today, I want to spend a moment and discuss with you some things to focus upon this month so that your commercial real estate is in synch with your other priorities. 

Your lease. As an occupant of commercial real estate, your tenancy falls into one of two categories. You either lease from a related party - known as an owner occupied space. Or, the rents checks are sent to an unrelated entity - you have no ownership in the building. Hmmm. So, if the owner and occupant are synonymous - why would a lease be necessary? After all, rent flows from one pocket - the occupant, to the other - the owner. Essentially the same. Strongly encouraged is that you have a written agreement between the parties. Sure. As the owner and occupant - the terms and conditions of your lease - rate, number of years, etc. - can be flexible. But, make sure you have one. With an unrelated owner, a signed lease is paramount! So, I’d encourage you to locate a copy, scan it into digital form and save it where you can readily access the document. When does the term expire? If 2021 - you’ve some decisions to make. Are there extension provisions - options to renew, rights of first refusal, rights of first offer included? Most have time windows from which to be exercised. Finally, schedule a ZOOM or face-to-face   with the owner of your building. Annually, it’s great to discuss your company’s plans, concerns, and any latent issue relating to your premises. 

Insurance coverages. I must admit - to the delight of my friends in the insurance trade - I’m really unprepared to discuss insurance matters. Suffice to say, your coverage generally is annually renewable and should be carefully reviewed each year to insure - sorry - the lease requirements are met. 

Property taxes. These increase annually by a minimum of 2%. Regardless the form of your lease - payment is your responsibility. Typically, Gross leases bake in the amount but you pay increases and Triple Net leases bill you as due. Was your business address sold last year? If so, expect a little surprise in the form of an invoice. 
 
Common area maintenance charges. The cost of operating a parcel of commercial real estate - exclusive of property taxes and insurances - are sometimes lumped together as common area maintenance expenses - also known as CAM charges. Landscape maintenance, parking lot sweeping, property management, trash, common area unities, etc. are the likely categories. If your owner bills for these monthly - you probably got an estimate last year and the new billings start this year. Reconciliation should follow. If something appears mysterious - ask for back up. 
 
Building systems. Winter is a great time to check your air conditioning before the warm months hit us. HVAC contractors are not as slammed either. You’ll also want to check on your warehouse fire protection. Certifications are required each year and a more robust certification every five years. Who mows the grass and trims the trees? A review of price and services could be in order. 
 
Loans. Owned and occupied real estate that carry debt are subject to lender covenants, potential interest rate adjustments, maturity dates, balloon payments, and pre-payment penalties. See “Your Lease”. Located should be all loan documents with physical and digital copies. Is a refinance in your future? Might want to assemble tax returns, balance sheets, statements of income and expenses for the company and personally. 
 
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 Thoughts to Begin 2021

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Happy New Year, dear readers! With 2020 firmly in the rear view mirror and my “prediction column” completed a few weeks ago - today, my thoughts are random. Why limit the topics? So here are a few of the tidbits echoing in my dome. 
The Pandemic brought into focus a reality for me. As commercial real estate practitioners we have two things to share - our time and our information! Make them count. Working remotely - and without a commute - allowed me to find a couple of hours each day for productive activities. 

Our time. Each of us has the same amount of time - 24 hours a day, 365 days per year for a total of 8544 hours - to ply our trade. Don’t forget, we must eat, sleep, hang out with our families and enjoy some leisure activities. If you’re like most of us, your labor is compressed into 8-12 hours every day. Tenure in the business is not a predictor. Many veteran CRE pros spend over half their days brokering commercial real estate. But, certainly, if you’re new to the business - plan on starting early and staying late. I personally start my day with a 4:30 wake up! The key is HOW your time is spent because once it’s gone - you don’t get any more. So, I would suggest computing your hourly worth. Simply set a revenue goal for next year, compute how many hours you plan to work and do some math. You’ll arrive at a figure. Surprising, huh? Now. Only spend time on tasks that will return that hourly wage. If your hourly is $200 and filing brochures consumes your day - hmmm. Conversely, calling owners of 100,000 sf buildings and getting to know them - pays the wage. Learn to be quite stingy with your hours and invest them wisely. 
 
Information. CoStar, LoopNet, Reonomy, ProspectNow, Catylist, and other data aggregators have commoditized CRE data. Doubt what I say? I can open my CoStarGo app and pull a list of availabilities anywhere in the US. A quick review of comps and I am familiar with values. Is ownership mostly institutional? Reonomy and ProspectNow detail the answer. You may be wondering - where does the broker fit in? Exactly! What differentiates is the analysis of the data and the ”story” of the deals in the area. Only an agent, entrenched in the market, can recite this detail and add real value to owners and occupants. So, master your command of the data! Learn the trends, become conversant with prices, know every building, understand the drivers, meet the influencers. Dominate your geography and become the resident expert. Through specialization - product type, geographical area, square footage, or business genre - can you achieve this level of competence. 
 
If you learn to master your data and manage your time you can enjoy a long successful career!
 
Goal setting. I invested in professional coaching in 2018 and have continued. The results have been transformational! As I write this column - I’m also completing a comprehensive look at 2020. What worked, what didn’t and why. This reflection will morph into 3-5 SMART goals for 2021. If you’re unfamiliar with SMART goals - as you know, I love acronyms - the letters abbreviate Specific, Measurable, Actionable, Realistic, and Timetable. Thank you Michael Hyatt! I generally mix in a benchmark as well. After all, you must understand where you are today. 
 
Let’s make 2021 our BEST year yet! Shall we?
 
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.

6 Credit Enhancements

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Merry Christmas and Happy Holidays to you and yours, dear readers! With 2020 rounding third and heading for home - left in my stocking were some transactions that require a nudge in security. We generally see such enhancement requests in lease transactions although one of our lumps of coal is a sale. A review of our solutions is the subject of today’s missive - so buckle up.

As previously discussed, a lease deal is an extension of credit from the owner of the real estate to the occupant. Simply, a landlord will calculate the total consideration of the agreement by multiplying the monthly rent plus annual increases for the term of the lease. If our monthly rent is $30,000 with 3% yearly escalators over a five year span - promised is approximately $2,000,000. Don’t forget to layer in the cost of rent concessions, tenant improvements, brokerage fees, and the like. For our example, we’ll assume these add-ons escalate our amount by 10% - another $200,000. So, our title holder wants to be assured the new tenant can fulfill a $2,200,000 obligation. If after reviewing the financial information provided, a doubt exists - expect the lessor to push for an enhancement. The form and format can morph. Below are some ideas. 

Personal guarantee. Frequently the tenant is a corporation. The C or S version has is a legal unit with underlying owners. Depending upon the complexity of the corporation, the ownership may be an individual or a number of shareholders. In the case of the former, a simple understanding the individuals are responsible if the corporation defaults can shore up performance. Sans a tangible individual - like in the case of a publicly traded group - personal guarantees aren’t feasible. 

Additional security deposits. Quite easily. Typical upon lease execution - rent for the first month and a sum equal to the last is deposited with the owner of the building. Sure. Some lease language allows the security deposit to cover abnormal premise wear and tear - but the primary purpose is to insure timely rent payments. Increasing this amount two or three fold can give some parcel owners a reason to say yes. 

Letters of credit. Good in theory - tough in practice. In essence, requested is an amount of future borrowing sufficient to stem the bleeding. But, if the tenant is sketchy - encumbering their ability to seek financing is difficult. I’ve seen this requirement spook occupants. 

Entity guarantee. Multi-layered corporations create operating companies akin to the layers of an orange. Once you peel back the skin - where’s the fruit. Sought by a holder of commercial real estate? The company signing the lease needs to own the assets - cash - capable of paying the rent. If not, a hollow barrel exists. Try drinking from said barrel. Yep. Nothing there. We’ve solved this in the past by requiring a parent corporation to sign. Just make sure the parent has chops. If not you’ll have an empty guaranteeing an empty. 
 
Reduction in concessions. Generally, we see two types of tenant requests. One of those is free or abated rent and the other is above standard office improvements. In the first case, lessening the amount of free rent requested can solve the problem. Maybe - vs a free month - two half months can be substituted. Or, placing the abatement in the later years. With tenant improvements -  two issues exist. There is a cost associated with producing the over standard build out. Plus, if the tenant doesn’t live out the lease term, the owner is faced with above standard goodies which may not have appeal.
 
Other solutions. Maybe pre-pay some months of rent. A well funded startup with adequate capital reserves but a short time in business will find this palatable. Consider a 
shorter term. In our illustration above - going from five years to a three year term and a two year option to extend may be all you need to do. 
 
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.

6 Non-Starters for Commercial Real Estate Deals

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Commercial real estate transactions, akin to a dance, take two to tango. In the case of a lease - opposite are the tenant and landlord sometimes called Lessee and Lessor. When a building purchase is considered, a buyer and seller square off. Customary in both is a negotiation which precedes the agreement - a lease document or purchase and sale contract. Outlined in most negotiations is a set of deal points - price, term, concessions and the like. Generally, both sides of the aisle have representation - a commercial real estate professional or a real estate attorney. Depending upon the dollar consideration, both vocations may be employed. Frequently, a general outline is submitted by brokers and agreed to to by both parties and then attorneys fine tune the language. When a deal takes flight - it’s a beautiful thing. But, there are some requests which prevent lift-off. A few of these “Houston, we have a problem” are listed below. 

Termination clauses. Occasionally in a lease arrangement - especially with major corporations - an “opt-out” provision is requested. Simply, these give a tenant the right to terminate their lease prior to the expiration. Flexibility - in case the space is outgrown or exceeds capacity - generally is the reason. But these wreak havoc on the back and forth. You see, an owner expects a flow of income for several years. Rate, concessions, and motivation are reflected. If this stream can be interrupted - landlords view the worst case and react accordingly. A five year lease with a termination after three really is a three year commitment. 

Options to buy. Options benefit the occupant. Period. Terribly one sided and limiting - many owners simply refuse to consider them. You see, if the title holder grants an option to buy, he’s locked in. Sure. He can sell to someone else, but the new buyer must honor the option. It’s murky. Softer solutions exist. Rights of First Refusal or Rights of First Offer are examples. 
 
Special purpose tenant improvements. If you’re looking to a landlord to fund your freezer cooler space, add a clean room, or double the amount of private offices - expect some reluctance. Typically, dollars invested to modify a building are viewed for their reuse. An owner considers how valuable the adds will be to future residents and responds accordingly. 

No financing contingency. We sold a property earlier this year for the income it produced. Our buyer was a well-heeled investor with ready cash to deploy. He will not occupy the building but will own it and reap the returns. His offer did not require a loan - therefore his performance was not conditioned on a lender nod. However, most buyers who plan to house their business within the premises need some time to get funding. A seller unwilling to allow this contingency may force a buyer to look elsewhere. 
 
Closing extensions. A seller planning to re-invest the proceeds through a tax deferred exchange has strict timeframes to follow once the sale consummates - 45 days to identify within a 180 day completion. Therefore, we occasionally see extension requests. If closing is delayed, the clock remains at zero until the deal is done - thus giving the seller “free time” to find a replacement property. Buyers are in peril, however, as loan commitments or operational needs dictate their timing.  

Lengthy contingency periods. Sellers seek certainty of close. Extended uncertainty will kill most transactions. A great example occurs when a buyer contemplates a use change - like converting industrial to residential. Municipalities have something to say and they say things quite deliberately. It’s not uncommon for the rezoning - if needed - to eclipse 18 months. An awful lot can change in that period. Consequently, few sellers are willing to “tie up” their property on a maybe. 
 
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.