The Importance of Dates

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Today, dear readers, I’d like to talk about dates. No, not those that emerge from swiping right - where’s the challenge there, btw? Or, for those frothy products of palm fronds that find their way into a shake. But, those calendar creatures that presage the passage of time. You see, dates are quite important in a commercial real estate transaction. Indulge me, as I share a few examples.
 
Time is of the essence. A fancy legal way to let you know - hey, pay attention! I learned this the hard way early in my career. We negotiated a five year lease. My guy ultimately wanted to buy the building. Thus, we convinced the landlord to grant us an option. Well, the date for exercising said right - by notifying the owner in writing - came and went as did our opportunity. Ooops! Fortunately, the title holder was forgiving and allowed us a bit of grace - but not before a finger wagging letter was sent our way. Contained within most commercial real estate agreements are these words - “time is of the essence.” Governed are all the dates - commencement, expiration, notices, and extensions. Wise agents calendar the important ones lest they blink past. I’m penning this post three days late. Hopefully, my editor will allow some latitude.
 
Leases. Leases memorialize the terms and conditions of landlord and tenant understandings. Generally, a commencement date signals the start. Early possession may indicate an earlier date under in which the occupant is granted access. Expiration occurs at the end. Easy! Not so fast. Don’t forget rent increases that bump throughout the term - typically on the anniversary and by a preset or calculated amount. Then there are expense reconciliation dates. Expect these in February. As mentioned above - extension rights such as options to renew, extend, expand, contract, and ownership options such as rights of first offer, refusal, to buy come with dates. Fortunately, in the case of options to extend - you’re afforded a window - like no earlier than nine or later than six months from expiration. Approaching expiration - you’ll make a decision to stay or move. Staying might be for an additional term or month-to-month. Yes. Dates are involved.
 
Escrows. Purchasing commercial real estate is a rather involved dance defined by days on the docket. A signed purchase and sale agreement is delivered to a clearinghouse of documents and dollars - AKA an escrow holder. Date of the agreement, yep. Date of full execution, sure. Dates for deposits to be received, uh huh. Date for additional deposits, boom. Ok, got it. But, lurking within the boiler plate are dates under which contingencies are outlined. How much time will a buyer have to arrange financing, inspect the condition of the roof, visit the city and check on uses, review title for any exceptions - etc. And. When will these time stamps commence? Upon buyer and seller signing the contract, seller delivery of an important document, preliminary title commitment or the opening of escrow? Yes, yavol, oui, and si! As you may have gathered - a cacophony of calendar credits consists. And ALL of the dates are as important as your first one with your significant or as memorable as waiting in line on PCH. You may be wondering - how does an agent keep track? Many employ a critical date calendar produced by the escrow holder. Or, we group certain waivers together. Or, we simply write into the contract language that reads - “the later of 30 days from opening of escrow or five days from receipt.”
 
So, don’t date yourself by using a paper calendar or singing “Eye of the Tiger”. Simply, use a modern tool that can provide calendar alerts - like when it’s time to head to Laguna and wait in line for a shake.
 
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. 

True Down Payment Amount

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As you’ve read here a number of times - purchasing commercial real estate is a great way to build generational wealth. It’s like a jelly of the month club. By that, I mean the gift that keeps on giving! Many who read this column founded an enterprise housed in a parcel of commercial real estate which they also own. So. The occupying company earns income through its business operation and pays rent for use of the building. Company value increases over time and the address appreciates. A double whammy! Southern California has countless entrepreneurial stories whereby a generation took a risk, formed a company, bought a location and succeeding family members benefited. I have the privilege of counseling these family owned and operated manufacturing and logistics businesses. 

Recently, a conversation occurred which I believed column worthy. Specifically, how much should be allocated for a down payment when considering a buy? The easy answer is 10% of the purchase price if leveraged through the Small Business Administration and 20-30% when financed conventionally. Boom. Done. See y’all next week. But, there is substantially more to the story of originating a loan. So please stay tuned for a minute more. 

In addition to the 10-30%, suggested would be to budget for the following: 

Appraisal. Regardless of your lender choice - SBA, bank, insurance company, or hard money - an appraisal will be completed. Contained within the bank’s underwriting - this confirms the price paid is in line with the market. Plan on $2500-$5000 for this review. 

Environmental. Lurking beneath the surface of your purchase could be a problem. These unseen issues are caused by something toxic deposited in the soil. A review of the previous occupants in the building, messy neighbors, and the smokestack down the street combined with a look at old aerial photos - forms what is known as a phase I environmental report. Generally, this does the trick and provides a clean bill of health. If recognized environment concerns - such as stained concrete or containers of waste - abound, a phase II will be employed. Soil borings are sampled and tested. Recommendations range from no further action to remediation. Have you ever witnessed a pile of dirt inside yellow tape next to a gas pump at your local station? No. It’s not an episode of CSI. Aeration is one way to get the bad stuff out of the soil. Plan on $2500 for a Phase I to ?? If remediation is required.

Legal. You’re going to want an attorney to review the purchase agreement, title commitment, and draw your LLC formation documents. Budget around $10,000. 

Escrow and title. Sure. Seller pays for a standard policy but any lender policies or extended coverage are yours to bear. Plus, you’ll pay 1/2 of the escrow fees. Another $10,000 but dependent upon deal size. 

Survey. Not always necessary unless you’re after an extended policy of title insurance. Unrecorded easements, abandoned driveways, and recorded leases are typically not covered with a standard policy. Utility locations, property lines, and underground pipes are clearly mapped as well. $5000 is reasonable. 

Loan points. In addition to the interest payments due over the term of your debt - you’ll pay a percentage of your loan amount to the bank. 1-2% is pretty typical. 

Cost segregation. One of the really cool things about owning commercial real estate is the depreciation which lowers your income tax burden. The improved portion of your parcel - the buildings - can be depreciated over 39 years on a straight line. 1/39th each year. But, other components of the improvements such as walls, doors, glass, and air conditioning have a shorter useful life and if properly segregated - can be written off sooner. Usually your CPA can help with this. She’ll want to be paid, though. $15,000 seems fair.

Once you become the owner, gather and total your receipts. Add all you spent to the 10-30% down payment. What results is the “true” investment into your buy. 

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.