Family Business

As I've shared in previous columns, much of my time is dedicated to counseling family businesses, those closely held manufacturers and logistics providers that form the backbone of our local economies. Often, my involvement is sparked by pivotal moments, such as a succession plan or the acquisition of a competitor. On the flip side, I've witnessed family-owned companies being acquired by private equity groups on buying sprees, seeking to acquire, fix, and flip. In nearly every scenario, a common thread emerges – a commercial real estate requirement, most frequently the need to dispose of excess facilities.
 
Recently, I had the privilege of gaining insights from a family-owned and operated manufacturing company right here in Orange County. While no major transition is currently underway at Hydraflow, I believed that sitting down with a family deeply entrenched in our local business landscape would offer valuable perspectives. Thanks to Pat Soldano of Family Enterprise USA, an advocacy group championing family businesses, I had the opportunity to connect with the leadership team at Hydraflow - Cindy Ayloush, CEO and daughter of the founder and her children, Sasha and Ramsey. 
 
Perched atop a hill in Fullerton, Hydraflow occupies a 174,000-square-foot facility on what was once part of the vast Hughes Aerospace campus. Designed by Ware Malcolm, another stalwart in our county's business community, and constructed by Snyder Langston in the early 2000s, this facility is a testament to Hydraflow's commitment to growth and innovation. Having toured countless manufacturing plants, I was struck by the impeccable cleanliness and efficiency of the layout. However, what truly stood out was the palpable sense of family permeating the atmosphere, evident not only in their operations but also in the abundance of company swag proudly worn by the staff. Tragically, Cindy’s dad and founder of Hydraflow, Leonard Edward (Len) Ullrich passed away shortly after the move, on February 7, 2003. He had faithfully shepherded the company through five decades, weathering various challenges and multiple relocations across East Los Angeles County. I’m certain, Len - founder of the company, father to Cindy and her late brother Dennis, and grandfather to Sasha and Ramsey would be blushing with pride if he could witness his legacy.
 
Leonard Edward Ullrich laid the foundation for Hydraflow's journey in 1961 when it was a mere two-employee operation working out of a converted two-car garage in Maywood, California. Back then, it bore the name Hydraflow Supply and began as an industrial hose distributor. Len's vision extended beyond mere distribution, as he aspired to become a designer and manufacturer. With prudent foresight, he chose to slowly nurture his customer base while maintaining the distributorship.
 
The pivotal shift towards design and manufacturing took place in 1968, and in 1970, Hydraflow expanded to a larger facility in the City of Commerce. Over the years, their business extended its reach into both military and commercial aircraft sectors. The 1970s marked a significant turning point, with Hydraflow finding its niche in low-pressure fluid transfer products. Through the 80s and 90s, the company continued its steady growth trajectory.
 
According to Cindy, from its inception, Hydraflow has been grounded in the values that Len held dear - customer service, hard work, frugality, family, and ethics. These Midwestern values formed the bedrock of the company's culture and have continued to guide its growth. Today, with over 250 employees, Hydraflow is renowned for its expertise in designing and fabricating low-pressure fluid transfer components tailored for aerospace and high-technology applications.
 
But as with any long-standing family business, Hydraflow faces its share of challenges. Material shortages, compliance and regulatory complexities, finding and maintaining quality employees, and generational pass-throughs are just a few of the hurdles they navigate.
 
These challenges reflect the evolving landscape that family-owned businesses navigate. However, Hydraflow's ability to address and adapt to these challenges showcases their resilience and adaptability. They remain dedicated to preserving their family legacy while thriving in a competitive business environment.
 
Hydraflow's journey is a testament to the enduring spirit of family-owned businesses. Their story reflects the values and vision of their founder, the dedication of their leadership, and the commitment to serving their customers and community. As we celebrate the success of companies like Hydraflow, we are reminded of the strength and innovation that family-owned businesses bring to our local economies.

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?

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.

Subleases - What Causes Them?

Penning this in the final month of 2020 - my thoughts consider 2021 and what might be coming. I suspect, a tremendous amount of “shadow space” better known as subleases will fill the landscape of office and retail availabilities next year as occupants adjust to the realities of the pandemic economy. Sure. We could also see industrial overruns - but for very different reasons. 

A bit of context to begin. Commercial real estate is occupied by the building’s owner, also known as an owner occupant or by an entity unrelated to the title holder - a tenant. In the case of the latter, a contract exists. Leases, rental agreements, or the like state the terms of the relationship - monthly amount paid, number of years, responsibility for maintenance, and who pays the property taxes and building insurance. When a change occurs during the term of the lease - causing a shift in the real estate requirement - one result is sublease space. 

So, with that general background, allow me to explain excess square footage and specifically what causes it with office spaces, retail storefronts, and industrial boxes. 

In our first example, let’s take your local attorney’s office. Generally, these counselors lease their spaces. Ok. Some take advantage of the benefits of owning their locations...but play along with me. Assume at the beginning of 2021; three years remained on a five year lease the firm signed in 2019. Once “stay at home” orders took effect in mid-March - the group found itself with most of its practitioners working from home - and loving it! Now, that marble floored and mahogany paneled boardroom is rarely used. The plethora of private offices - which are typical - now lay fallow. However, rent payments are still owed. Decision time. Is the under utilization permanent - meaning a need for a smaller footprint? Or, will full staffing exist soon? In the former - you have the classic need to find an occupant willing to morph into the vacant seats and fulfill the law firm’s remaining obligation - a sublease. 

Another situation - which floods the sublease market - is observed at virtually - sorry - every regional mall, power center, strip, and freestanding big box retailer in SoCal. Pier One, Steinmart, Bed Bath and Beyond, JC Penney, Brooks Brothers, Forever 21 and other name brand outlets all took their lumps this year. Many shut their doors for good. Others are surviving - but just barely. In every business failure, leases must be considered. Some are abandoned through bankruptcy courts. Select ones leave vast, vacant, dark holes where vitality previously existed. Low cost providers such as Tuesday Morning take over. Although, for how long? Creative solutions emerge such as the Union Marketplace in Tustin’s District - a former Border’s Book Store. There, the larger space was chopped into smaller experiential retailers. But suffice to say - leases must be consumed. 

Finally, industrial buildings. You know, those concrete behemoths which house a variety of manufacturing, warehousing, and service concerns. A very different dynamic will create vacancy in 2021 - companies outgrowing their spaces. With the spate of on-line shopping - ECom providers cannot keep enough stock on hand. Food producers are slammed. Any company manufacturing repair and replacement parts is thriving. Try getting a plumber out to fix a leaky toilet at your home or business - good luck! One of our clients distributes mufflers. With the number of folks staying home and extra $$ piling up because they can’t go to Disneyland or the movies - yep. They’re fixing their cars. A building conversation faces them next year. They’ve eclipsed their capacity. Another is also an automotive distributor. Recently, their demand was so great they opted to double their square footage and find someone to sublease the building they vacated. 

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.