Five most frequently asked questions

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Next month I celebrate 39 years brokering commercial real estate in Southern California. My office of Lee & Associates celebrated 40 years this month. That’s right! All if my days have been spent at the same shop - a rarity. Logging weekly my thoughts and experiences started with the Location Advice Blog in 2010. And the Southern California News Group started publishing my writings in February 2015. Yep. Over eight years and 400 plus columns.
 
What follows are the five most frequently asked questions of me as a commercial real estate practitioner. Plus, I will throw in a bonus one! Stay tuned.
 
Question number five: Can I make changes to the space and if so, who pays for it? Generally and it depends.
 
Changes to a location - additional office, power upgrade, sprinkler retrofit, paint and carpet, moving walls, installing racks, distributing power, etc. can generally be accomplished subject to ownership approval and governmental approval with the proper permitting and code construction.
 
Changes to the square footage (IE: adding a structural mezzanine), changes to the common area, fencing required parking spaces, creating windows in bearing walls - not so easy.
 
Changes are typically paid for in one of three ways: the owner pays for all of the cost and concedes the cost (rare), the occupant pays for all of the cost (even rarer), or some combination of the two. This compromise could be an owner paying for the refurbishment of the space such as paint, carpet, and cleanup and conceding the cost and paying for the cost of a sprinkler retrofit and amortizing the cost over the term of the lease.
 
The "acid test" of who pays depends upon the owner's ability to pay, the owner's motivation, the general or specific nature of the improvements (think future marketability) and the market (is the competition delivering space to the market completely refurbished). Sometimes an owner will be willing to compensate a tenant in the form of free or half rent to offset the cost of changes.
 
Question number four: How do you get paid? The owner of the property pays us.
 
A common misconception is the fee adds to the purchase price or lease rate. The reality is an engaged agent can achieve a much higher purchase price than the typical owner because of market knowledge and experience. On the occupant side, an experienced agent can negotiate a better lease rate and concession package because of our knowledge of comparables, availabilities, and motivation. The net result is a better deal for both parties.
 
Question number three: How long have you done this? Since 1984.
 
 Real estate content (comps, avails, absorption, current pricing) is the same but the method of delivery is different. Who would have foreseen in 1984 that I would be doing this when I turned 66- prior to fax machines and the world wide web! Or, that we could survey inventory of available buildings - in our car - or at the beach - and send a list with images to our clients with the click of a button. Or, that we could send a video - in real time - of the property - unbelievable!
 
Question number two: How much is my building worth? That depends on a number of factors.
 
We consider the market - up trending or down trending, comparables and availabilities. If the market is up trending, chances are your building is worth more than the comps suggest. If the market is down trending, you might be best served to price lower than the recent comps and preempt a long marketing cycle. Marketing time plays a role. How long can you afford to market the building? A fire sale motivation will cause the building to be worth less. Does the building have special amenities - excess or surplus land, upgraded power, fenced yard, freezer/cooler space, special AQMD permits, etc. For the right buyer or tenant, these amenities can add to the price.
 
Question number one: How is the market? Weird.
 
I’ve written as nauseam lately about our markets. Suffice to say a lot has changed since our normal up-trending 2019 commercial real estate market. Global strife, a pandemic, decades high inflation, recessionary fears, interest rate hikes, and bank failures have all added an air of uncertainty to the ways owners and occupants of commercial real estate view the world.
 
Bonus question: How do you come up with your content week after week? Different ways.
 
Typically, I gain inspiration from the economy, deals I’m transacting and client interactions. Oh. And my occasional neighbor insight. Thanks Rudy.
 
Did I leave any out? Please comment below with your question and I will promptly respond. 

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.
 
 

Not All Industrial Buildings Are The Same

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As we’ve discussed many times - commercial real estate is as varied as a teenager’s moods. Sure. We deal in three specific asset classes - industrial, office, and retail. But within each are subcategories that create the variations. Certainly a regional mall is different than a Mimi’s Cafe. Your doctor’s office contains different amenities than the location where your CPA resides. Today's column deals with the features that define the different types of industrial buildings. There are three main categories of industrial buildings - manufacturing, logistics warehouses, and flex. So how do I know which category appeals to the genre of industrial occupant? Continue reading and I will draw the distinctions.
 
Manufacturing Buildings: Manufacturing buildings are locations - generally constructed of concrete, concrete block or metal - where products are made, stored and shipped. The raw materials of the manufacturing process are generally stored on site (many times in an outside storage yard so as to not poach inside floor space) as well  as the machinery that makes the products and the employees that operate the machinery and support the manufacturing process. These buildings can be "freestanding" or parts of a larger building but typically have greater power feeds into the building, 10-30% of the total square footage in office space, ground level loading doors vs truck high loading doors (some may have both), fenced outside storage areas, and a warehouse clearance of 14-24' under beam in the warehouse/plant area. Because these locations have more office space typically, they also have more parking spaces - a minimum of 2 parking spaces per 1000 square feet of building. Manufacturers can generally operate in a building with lower ceiling height because their plant is consumed with machinery and raw materials vs finished goods waiting to be shipped. Most products are made and delivered within days - so as not to inventory a large amount of finished goods. A distribution warehouse as described below will typically not fit a manufacturing requirement however some distributors may be able to occupy a manufacturing building especially if the building is equipped with ground level AND truck high loading.
 
Logistics Warehouses: Logistics buildings used to be referred to as distribution warehouse buildings. They generally are made of concrete (because of the wall height). Products are staged, stored, and shipped from within their walls. Typically, no manufacturing or assembly is done on site. Consequently, fewer support staff and no raw materials are housed at the location. Logistics buildings require truck high loading, warehouse clearance of a minimum of 24' and truck turning radiuses of 130' or more. The ideal set up is a rectangular building with "cross dock" loading so that the point from stored goods to loading doors is minimized. Because these buildings typically house fewer employees, the premium on office space and parking is lessened. These buildings normally have a parking ratio of 1 parking space per 1000 square foot of building
 
Flex (or Flexible): The personal computer boom of the early/mid-1980s gave birth to a new industry and consequently a new type of industrial building, the flex building - formerly referred to a Research and Development building. Since computer companies employed a large number of skilled workers, the typical industrial building didn't contain enough office space or enough parking for additional office to be added. Developers of R and D buildings created the "mezzanine second story" which enabled a smaller lot to accommodate a larger building. The silicon valley in Northern California and the Irvine Spectrum in Irvine is populated with flex buildings. These buildings are locations - generally made of concrete and glass because they are modern and are occupied by a high technology manufacturing or assembly group and a large employee count - engineering, accounting, purchasing, sales, sales support, customer service, etc. Parking, power and office percentage and layout are the important features with these buildings. These structures are typically parked with 3 or 4 spaces per 1000 square feet of building and in some cases can accommodate a use that requires 100% office. Less important are loading, clear height in the warehouse and outside yard storage.
But, alas, our world is built on exceptions. True with locations as well. You may have some of the characteristics of all of the above in your location and it functions just fine. The above are true in the "classic" definition of the building types.

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.
 
 

Rain Over for the Season?

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Is our rain over with for the season? My guess is we’ll see one more soaking in May and then possibly during the monsoonal desert period in July and August. But what a wet one we experienced this year! The downside of so much moisture this year is owners throughout Orange County, California heard the collective screams of help from their occupants - as seemingly water tight roof membranes start to leak. 

 
One of the most common questions, we are asked by occupants of industrial/commercial real estate is, "who is responsible for the roof?" So if you’re leasing a new space or dealing with an existing one - this column should serve as a guide.
 
So let's dig in, shall we?
 
Before the water comes pouring into your office or warehouse from any future downpour, do yourself a favor, grab a copy of your lease (if you have one) and take a look at a couple of areas.
 
First, take a look at the heading across the top of the first page. There you should find reference to "Net" or "Gross". This is an important distinction, as the main difference between the two leases is the roof responsibility. The vast majority of leases in Southern California are on a form known as an AIR CRE form and could read something like this..."AIR Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease--Net". Generally, in a Gross lease the owner is responsible for the roof and in a Net lease the occupant is responsible. There are some specifics, however, that should be understood.
 
Next, take a look at a paragraph entitled Maintenance and Repairs. In the AIR leases, the paragraph is 7 on page 5 and 6.
 
Responsibility for the roof on an industrial/commercial building is specifically broken down into three categories - maintenance, repair, and replacement. You should read how your specific lease deals with each item.
 
Maintenance: Most leases (and definitely the AIR forms) specify which party maintains the roof and call for the maintainer to have a service contract for the maintenance. Many maintenance contracts include an annual visit for removing debris from the roof and making sure the downspouts are clear. Sometimes roof leaks occur when ponding builds at the downspouts because they are clogged. The puddle sits at the low point of the roof, weakens the membrane and leaks occur. Another culprit is the area around roof penetrations (such as HVAC units) that are not properly masticked. When the mastic becomes dry and cracked, the material loses it flexibility and water can seep through. A normal maintenance visit can shore up these issues and prevent leaks during the rainy season - like this year!
 
Repair: Once again, most leases outline which party is on the hook to repair a roof if fixes are needed. In the case of a Gross lease, the owner performs the repairs and in a Net lease the repairs are the occupants to perform except to the extent that the repairs exceed 50% of the price to replace the roof.
 
Replacement: In a Gross lease the owner is responsible to replace the roof at her sole cost and expense. In the case of a Net lease, the owner is generally also responsible but only when the cost of repair exceeds 50% of the cost to replace. Within the AIR language, the owner replaces the roof, at her expense, and then amortizes the cost over 12 years. 
 
So, in the case of a Gross lease, blow up your owner's phone. In a Net lease, HELP is all you. Call a roofer!

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.

What A Wedding Can Teach Us About Commercial Real Estate

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For those three of you - thanks Rudy - that missed my column last week, I was on brief hiatus as lwe were celebrating the union of two souls. Our son Michael and his new wife Candice said I do to a bevy of friends, loved ones and a beautiful backdrop of Mother Nature. You see, the ceremony was officiated well off the Ortega Highway at a venue called Jewel of the Ortega. A bit of a haul to get there - but oh - quite worth it. The day dawned sunny, clear blue, and warm - ideal for the exchange of vows. So many years of happiness together is my wish for the couple.

What follows seemed quite fitting for the lessons learned from the event.

Selling a commercial real estate asset is akin to planning a wedding - sure, you can do it yourself but things go much more smoothly if you have a wedding planner - AKA a commercial real estate professional.

Certainly, you can do a quick Loopnet search, establish a price, purchase a For Sale sign at Home Depot and wait for the phone to ring - set the date, book the venue, buy some suits and order the cake - this is easy!

Vista Print will create a glossy brochure of your building, mail a few to the neighbors and the inquiries will start to flow - Wow! They do wedding invitations too? Cool! Invite aunt Marjorie and a few dozen friends and let’s do this!

Just got your first hit! They want to see the building next week. Oh wait, you’ve a day job and can only meet the buyers on weekends or evenings. Hmmm, this doesn’t work for the buyers- now what? I guess you could slip out during lunch - but what if the buyer is late or stiffs you? Time wasted - and on an empty stomach.

OK, you get them through. They like it. An offer will be forthcoming. I’ll bet you’re glad you’re saving that 6% you’d have paid the broker. Why don’t more folks do this themselves?

Your prospective buyers call. Do you have a recent appraisal? Does the roof leak? When will the tenant vacate? What will be left when the occupant leaves? I noticed the building doesn’t have central air. Do the cracks in the floor portend something serious? Would you consider seller financing as we have a small credit blip - a bankruptcy? Oh, by the way, my wife has her agent’s license - so we will be deducting 3% from our offer. Next!

Three different agents - who comb the area - call. We have qualified prospects who would like to see your building. Will you pay us a fee if we bring you a buyer? Can you forward to us any marketing collateral you have? Any idea how much electricity feeds the property? - as one of our buyers is a machine shop. One of our guys stacks products high in the warehouse. Will the sprinkler system handle high-piled storage? What is the zoning? Our buyer is a trade school. Will the city allow that occupancy without a conditional use permit? Hmmm. Feeling a bit overwhelmed?

Finally, your perfect buyer appears - dressed as Prince Charming. Let the wedding bells ring! After all, a commercial real estate deal is a union of sorts. You gloat a bit as your email buzzes with a full asking price offer. No financing required, quick close, as-is - alright! Done. But, not so fast. You see, this buyer has made three full price offers to three separate owners. His plan is to tie up all three - and jettison two of the three. Will you be saying I do? Or, I wish I had - hired that broker.

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.