What can the City of Brotherly Love teach us about commercial real estate?

Our travels took us to Philadelphia, Pennsylvania last week. No. Not for the pivotal Dodger vs Phillies series but for a stop on my book tour and bit of work. Yes! We were able to sample a Philly cheesesteak - alas a vegan one - and ascend the Rocky steps to city hall. We even attended a musical in the same theatre Thomas Jefferson graced in 1807.
 
You may be wondering what a trip east can teach us about commercial real estate? Indulge me while I review a few reasons.
 
Legacy matters. Walking the cobblestone streets of Old City, you are reminded that history leaves an imprint on everything. The architecture tells a story of adaptation and endurance. Buildings that once housed print shops or tanneries now host tech startups, art galleries, and coffee roasters. The lesson? A well-built structure can live many lives. In commercial real estate, we often focus on the next deal, but Philadelphia reminds us that long-term vision and sound fundamentals outlast the trends of the moment.
 
Density breeds creativity. Every block in the downtown core bursts with energy. Office towers sit shoulder to shoulder with residential conversions and vibrant street-level retail. It is a living example of how proximity drives collaboration. In Southern California, where sprawl is our default, we can learn from Philadelphia’s mixed-use fabric. The best projects today are those that layer uses - industrial with office, retail with residential, community with commerce. When people and ideas collide, opportunity follows.
 
Transit changes everything. Unlike most West Coast cities, Philadelphia was built for pedestrians and trains, not cars. That simple difference shapes land use, property value, and even tenant demand. Industrial users there still rely on rail access. Office tenants value walkability. Neighborhood retailers thrive because foot traffic never stops. The takeaway for us is clear: accessibility sells. Whether through freeways, ports, or planned transit corridors, the ease of connection defines the worth of location.
 
Pride of place builds value.
Philadelphians are proud of their city. You can feel it in every mural and every conversation at the corner market. That civic pride translates into investment, maintenance, and long-term ownership. As brokers and owners, we know that when people believe in their community, properties stay leased and values rise. A clean street, a cared-for façade, or a supportive business district can elevate an area faster than any zoning change.
 
Reinvention is not a phase - it is a way of life. From its colonial roots to its modern skyline, Philadelphia has reinvented itself countless times. Industry shifted. Populations moved. Yet the city continues to evolve, not resist. That spirit of adaptation is exactly what today’s commercial real estate world demands. Office conversions, e-commerce distribution, re-shored manufacturing - all of it requires the same willingness to look at existing assets and ask, “What could this become?”
 
So, what can the City of Brotherly Love teach us about commercial real estate? That legacy, density, access, pride, and reinvention are not just urban characteristics. They are timeless business principles. The best deals, like the best cities, are those that continue to create value long after the ink dries.
 
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.
 
 

2025 Predictions

Happy new year dear readers and welcome to 2025! Yes.  It’s that time of year when I get to prognosticate on what this year might bring in the world of commercial real estate. I have a high bar to reach since my 2024 crystal ball was in fact, crystal. 
 
So what might 2025 bring? Let’s get our Nostradamus on, shall we?
 
The State of the Market
As we step into 2025, it’s clear that the ripples of 2024’s market conditions are still making waves. The industrial sector remains a mixed bag—demand for large logistics spaces has softened compared to its pandemic-era peak, but there’s still steady activity in the smaller spaces under 200,000 square feet. Many owners entered this year holding their breath as vacancy rates ticked up in certain submarkets.
 
Interest rates, the ever-present elephant in the room, continue to dampen transaction activity. The cost of financing has sidelined some buyers and made leasing a more attractive option for others. Meanwhile, sellers are navigating the gap between the prices they want and the reality of what the market will bear.
 
Prediction #1: The Return of Creativity
Necessity is the mother of invention, and in 2025, we’ll see more creativity in deal structures. Sale-leasebacks, options to buy, seller financing, and joint ventures will gain prominence as market participants find ways to make deals pencil. Sellers who resist adjusting to the current pricing environment will need to meet buyers halfway through innovative terms.
 
For tenants, expect landlords to sweeten the pot. More free rent, tenant improvement allowances, and flexible lease terms will be offered as owners vie for occupancy in a more tenant-favorable environment.
 
Prediction #2: Resilient Submarkets
While some industrial hubs will see softer demand, others will shine. In 2025, we’ll see heightened activity in submarkets that offer strategic advantages—whether it’s proximity to major ports, affordable labor, or access to large consumer bases. The Inland Empire in California and areas in the Midwest and Southeast will likely see continued attention from both owners and occupants. 
 
What’s interesting is the “flight to quality” within these markets. Class A properties with modern amenities, ample parking, and high clear heights will see increased demand because the price gap has narrowed between older, less functional spaces. 
 
Prediction #3: The Rise of Reshoring
Last year, we started to see the effects of reshoring—companies bringing manufacturing and distribution closer to home. In 2025, this trend will accelerate as the new administration takes office - especially in the industrial sector. Proximity to end users, reduced reliance on overseas suppliers, and geopolitical stability are driving this shift.
 
What does this mean for commercial real estate? 
Secondary and tertiary markets will shine as companies seek affordable land and labor. Don’t be surprised if you hear about booming activity in places you’ve never associated with industrial growth before.
 
Prediction #4: AI Steps Into the Spotlight
Artificial intelligence will play a bigger role in commercial real estate in 2025. From automating lease management and analyzing market trends to predicting tenant behavior, AI tools are becoming indispensable. Brokers, landlords, and investors who embrace AI will gain an edge in efficiency and decision-making.
 
One area poised for disruption is site selection. AI-driven platforms will help occupants analyze logistics networks, labor availability, and even local energy costs to identify the best locations. On the transactional side, expect faster due diligence as AI speeds up property evaluations, financial modeling, and risk assessments. Those who adapt quickly will find themselves ahead of the curve.
 
Prediction #5: Caution, Not Panic
If 2024 taught us anything, it’s that this market rewards patience. In 2025, investors will remain cautious but opportunistic. Those with cash will find opportunities to acquire properties at more reasonable valuations. Expect a slow-but-steady transactional pace as everyone waits for interest rates to stabilize and inflation to ease.
 
Occupants, meanwhile, will be strategic, leveraging market conditions to secure favorable terms while keeping a close eye on operating costs. Gone are the days of hasty decisions; this year, it’s all about deliberate, informed choices.
 
Looking Ahead
If I’ve learned anything from years in this business, it’s that predicting the future is equal parts art and science. The trends we see now—creativity in deals, resilient submarkets, reshoring, the rise of AI, and cautious optimism—are the best indicators of what’s to come.
 
So, dear readers, here’s to a year filled with resilience, adaptability, and maybe even a few surprises. Let’s revisit these predictions in 12 months to see just how clear my crystal ball was this time.
 
Cheers to a prosperous 2025!
 
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.
 
 

Gauging the Market

As commercial real estate  practitioners, we spend our days advising owners and occupants of locations. These may be office, retail or industrial. I’ve plied my trade industrially for over four decades in Orange County and the Inland Empire. Over time, I’ve seen some wild swings in market activity - also known as buying and leasing. 
 
The early nineties were mired in a deep sleep caused by the invasion in Iraq and the savings and loan implosion. We dealt with tepid demand until the middle part of the decade when velocity returned. The dot com bubble bursting and the financial - err - adjustment of the early and mid 2000s caused quite a ruckus as well. What followed was a spate of activity like no other we’ve  seen until - well 2020-2022. Now we sit with a lack of demand precipitated by uncertainty. Recall, I wrote about that last week. If you missed the column, you can refresh here. 
 
Today, I’d like to discuss a simple way to figure in which way we’re headed - up or down - with the scale pushed in favor of occupants or owners. 
 
If there’s one thing I’ve learned over the years, it’s that gauging the market isn’t just about looking at vacancy rates or rent trends—it’s about understanding the balance of power between owners and occupants. 
 
A simple, albeit informal, method I’ve used is what I call the "Sentiment Index." Essentially, it’s a measure of who feels the pain—or the confidence—more sharply: those with the space to lease or sell, or those seeking to occupy it.
Right now, what I’m seeing and hearing suggests the scales are tipping in favor of occupants. How do I know? Conversations with landlords have turned from boastful pride to cautious consideration. When owners and their representatives are more eager to have a “productive chat” about lease terms, you know we’re moving into a phase where flexibility and concessions might be on the horizon.
 
Lessons from the Field: The Subtle Shifts in Conversations
In fact, these shifts in tone can often signal broader trends before the numbers catch up. Let me give you an example: Back in the early 90s, during what many in the industry refer to as the post-S&L era, the signs of a cooling market weren’t apparent in the stats just yet. But for those of us on the ground, it was clear as day. What tipped us off? The tone of conversations with owners changed from assertive to inquisitive: “What’s happening out there?” took the place of “We’re holding firm at this price.”
Today, I’m noticing a similar shift. In the Inland Empire, where logistics had been king over the last five years, conversations that were once about jockeying for the best price per square foot have turned into careful discussions on structuring deals that create longer-term value. For example, some owners are asking about the implications of rent abatement periods or tenant improvement allowances—areas where, in stronger markets, the negotiation wasn’t as flexible.
 
Keeping a Pulse on Indicators Beyond the Numbers
But why focus so much on sentiment? Because market reports and metrics, while useful, can lag behind the reality on the street. When deals are being renegotiated, terms are becoming more flexible, and incentives are starting to creep back in, it suggests that demand is softening relative to supply. And that’s exactly what I’ve been noticing lately.
 
For example, last month, I saw a deal come together for a mid-sized logistics tenant in Riverside. The lease was inked at a rate that, six months ago, would have raised eyebrows among the ownership crowd. But with looming uncertainty, the landlord chose certainty of occupancy over a speculative holdout for higher rents. To me, that’s an early indicator of where we’re headed.
 
Occupants: A Window into Demand Dynamics
On the occupant side, I find their actions can tell us just as much about market direction. When they start negotiating harder on expansion options or holding off on committing to large leases, it’s clear they’re sensing future uncertainty. Right now, I’m seeing this play out with clients in the Inland Empire who are recalibrating their growth strategies to align with supply chain volatility and interest rate hikes.
 
If you ask an occupant why they’re hesitating, they won’t often point to market reports. Instead, you’ll hear things like, “We’re waiting to see if interest rates stabilize,” or “We’re worried about carrying costs if demand slips.” These concerns are less about where the market is now and more about where it’s headed.
 
Conclusion: Listening to the Market’s Whispers
In commercial real estate, the market doesn’t always shout its intentions—it whispers them through subtle cues. Right now, the whispers are pointing to a delicate balance, one that could easily tip in favor of occupants if uncertainty persists. The key is listening closely and responding proactively.
 
So, if you’re trying to gauge market activity, don’t just look at the metrics. Tune in to the conversations and observe the changes in sentiment. Those shifts can tell you more about where the market is headed than a spreadsheet ever could.
 
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.

Owner Mistakes Part 2

Last week’s column struck some nerves as I discussed the two most common mistakes I’ve seen owner occupants make with their commercial real estate. To refresh, not charging the operating entity a market rent and an absence of agreements between the ownership and occupant were the two mistakes discussed. 
 
Consistent among the emails I received were questions as to how. How should I go about determining a market rent and what form should the agreement take? 
 
What follows are some suggestions on how to accomplish both. 
 
Determining Market Rent
Let’s tackle the market rent question first. The key to setting a market rent is to think like an impartial third party. Imagine you don’t own the building, and you’re simply looking at it as an investment. What would you expect to pay if you were leasing the space from someone else? This mental shift can help you approach the task with objectivity.
 
A great place to start is by doing a bit of local research. Look at similar properties in your area that are available for lease. You can gather information from commercial real estate listings, or better yet, have a conversation with a local commercial real estate broker who specializes in your property type. Brokers live and breathe this data, and they can provide valuable insight into current market conditions and comparable rents.
 
Once you’ve gathered a range of rents for comparable properties, it’s time to adjust for any differences. Consider factors like the location, size, condition, and any special features your property might have that others do not. The goal is to arrive at a rent that is fair and reasonable for both the operating entity and the ownership entity.
 
Drafting the Agreement
Now, onto the agreement. This part can seem daunting, but it’s critical for protecting both parties involved—yes, even when both parties are you! The agreement should clearly outline the terms of the lease, including the amount of rent, payment schedule, length of the lease, and any responsibilities each party has regarding maintenance, repairs, and improvements.
 
While it’s tempting to simply draft something up on your own, I’d strongly recommend engaging a real estate attorney to help with this step. They can ensure the agreement is not only legally binding but also covers all the bases you might not have considered. Think of it as an investment in avoiding future headaches.
 
Putting It All Together
Once you’ve established a fair market rent and formalized the lease agreement, you’ll be in a much stronger position. Not only will your financial records reflect a more accurate picture of your business’s performance, but you’ll also have peace of mind knowing that both the ownership and the operating entity are protected by a clear, mutually beneficial agreement.
It might seem like extra work, but these steps are essential to ensuring your commercial real estate works for you, not against you. So, take the time to do it right—your future self will thank you.

Are Sale-Leasebacks still viable?

Our practice centers around family owned and operated manufacturing and logistics businesses experiencing a transition. Recently, I wrote about common transitions small businesses experience. Included among these were - dissolution of a partnership, sale of a business, acquiring a competitor, or the unfortunate circumstances of the death of a principal, divorce or some other distress within the enterprise. 
 
As reviewed, all of these transitions come with their own brand of commercial real estate solution. As an example, when a competing company is acquired - two cultures must be forged into one - akin to a blended household. As you can appreciate, this can cause some drama. As the operations are morphed - so must the locations from which they occur. Frequently, redundancy is experienced. Specifically, two buildings within the same submarket - where only one is needed. Consequently, one must be jettisoned. 
 
But, let’s examine the flip side - the seller of the acquired competitor. When the sale of a business happens, the addresses from which the trades are plyed are either owned by the principal selling or leased by said principal. In the circumstance mentioned above where two facilities are within the same geography, two different strategies are employed. If the redundancy is leased and a decision is made to abandon the building - we can sublease, pay double rent until the term boils off, or default - never recommended. If owned - now without an occupant - we can sell the empty building or lease it and hold on or possibly sell the leased location to an investor. 
 
But how about the chosen building - the one selected to carry forth the business of the company and not deemed excess. Then what? A building owner finds herself in position to assign the lease agreement if appropriate, or sell or lease the building to the acquiring group. 
 
All of the above scenarios contemplate the moves made AFTER the business sale. But are there maneuvers before such a liquidation? Certainly. And I’ll spend the balance of my words describing one such arrangement - the sale-leaseback. If you’re unfamiliar, a sale-leaseback allows the owner of the location to liquidate the real estate while allowing the occupying company to remain in residence under a long term lease arrangement. 
 
We were fortunate last year to complete five sale-leasebacks. Four of the five were done in anticipation of a sale of the occupying companies. In one case a principal’s death caused disruption and the need to quickly restructure and liquidate for the heirs - who had no desire to own a company or the real estate it occupied. In the other three - the principal was in his late seventies, had experienced a business downturn from the pandemic, but wanted to capture the appreciation of the real estate today in anticipation of a business sale in a couple of years. 
 
So, why do this prior to a company’s sale? After all, rent will no longer be received by the seller. In our experience, the reasons that follow are typical. 
 
A market rent is established from which a company’s value is derived. 
 
Real estate values ebb and flow. Taking advantage of a hot market can make sense. 
 
A marketable lease can be structured - with appropriate lease rate, terms, increases, and maintenance responsibilities. 
 
You may be wondering. Does selling real estate prior to a company sale affect the company buyer pool? It indeed can and this should be carefully considered before such a strategy is completed. How you may wonder? As mentioned above - a buyer with similar locations my view a long term lease as a liability. This occurs frequently when a strategic player emerges - a group in the same industry. 
 
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.
 

Advice if you’re considering selling your leased building

Occasionally, I’m asked how I get column inspiration. For me it’s a combination of reporting on macro trends in our industrial real estate market, advice I give my clients, issues that have arisen in transactions, and happenings with the business owners I counsel. Sometimes, a column idea falls from the sky - which happened today. 
 
Allow me to set the stage. I received an email from a client who recently relocated his business to a smaller leased location. The previous business address is owned. Upon my client’s vacation of the premises - he leased it to a neighbor. His plans - near term - are to move to a bordering state. Continuing to OEM real estate in California would create a undo tax burden on the income received vs selling the California asset and redeploying the proceeds into a leased building in a tax friendlier state. This, his motivation to sell. My client asked what considerations should be given for the framework of the lease agreement - allowing marketability and security. 
 
Below is the advice I offered. 
 
The lease should reflect a market lease rate - or as close as you can get. Value is a return on this rent. Consider swapping a couple of months free to get a higher rent figure. 
 
Build in sufficient annual rent increases. Most are written with 4% annual bumps these days
 
All “purchase rights” - options, rights of first refusal, rights of first offer should be eliminated. 
 
Make sure the tenant is responsible for all property tax increases when the property is reassessed after sale. 
 
The AIR Single Tenant Net Lease is widely used to document the deal. It’s common and most investors are familiar. 
 
Most investors want a relatively new roof and hvac units. Under a NNN lease, your tenant is responsible for maintenance and repair of these items but replacement is the owner’s responsibility - which can then be billed to the tenant monthly over twelve years. So, consider replacing these before sale. 
 
These days a five year lease is a minimum. 7-10 is much better - especially if you have the 4% kickers. 
 
Finally, credit of the tenant is huge. You’ll want to have two years of P and Ls, balance sheets, and corporate tax returns on hand. I’d see if you could get the principals to personally guarantee the lease to add a layer of security. 
 
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.
 
 

Five downsides of owning your building

Recently, I’ve spent time with three business owners who made a decision to own the building from which their companies operate. The benefits are myriad including - stability of rent the enterprise pays, appreciation, depreciation, and pride of ownership. But our conversations focused on a downside of ownership - rent subsidy and the impact this can have on the value of the company. Therefore, I endeavored to consider other disadvantages of ownership - which is the subject of this column. Let’s start with rent subsidy and its impact on a company’s value. 
 
Rent subsidy. Some would opine this is actually a benefit - the ability to charge the occupant a low monthly payment. Yes. In fact, one of the reasons to own a building that houses your operation is to keep the rent steady and avoid the ebbs and flows from a series of three to seven year leases. But, in my three conversations - the price an investor would pay for the company was affected. You see, all of the entrepreneurs are approaching an age where “what’s next” creeps into their consciousness. Many times this means a sale of the business. But if one of the cost elements - rent - is understated and the business can’t afford to mark said rent to market - the enterprise value suffers. 
 
No agreements. Frequently, an entity is created to own the real estate and another to own the business. Typically, synonymy exists between the two. Although the real estate ownership may be Allen C. Buchanan, LLC and the operating company Allen C. Buchanan, Inc.  with a common ownership - they are two separate companies with tax reporting, business licensing, regulatory and state registration requirements. Since one “owner” receives payment from the other and the “owners” have the same underpinning individual - seldom are proper lease agreements forged between the two. This lack of documentation can be particularly painful if an owner dies and her estate must now attempt to assemble paperwork justifying rent.  
 
Maintenance. If an occupant leases space from an unrelated landlord and not one with an interest in the company - strict language as to maintenance, repair, and replacements of the buildings systems is contained in a lease agreement between the two parties. Sans such an arrangement, maintenance of the roof occasionally becomes an afterthought. No big deal unless a sale with a leaseback of the premises is considered - in which case the buyer of the real estate will want an airtight roof and functioning air conditioning. 
 
Lack of flexibility. If a company’s capacity outstrips the physical plant of a building - ownership of real estate may inhibit growth. Should this need for additional space occur in a down market, uprooting from one building to another will be complicated. If financing requires the building be occupied by the business - as many SBA loans do - a real quandary arises. Sure. A move may occur and the former location leased or sold but it’s more complicated than simply moving at the end of a lease. 
 
Equity is bridled. With the amount of appreciation which has occurred in industrial properties in SoCal - many owners are sitting in mountains of equity which if tapped could be used to hire employees, buy machinery or inventory, acquire a competitor or expand out of state. But unless the real estate is sold or refinanced - the equity just sits idle providing the rent subsidy as described above and a smaller return to the owner than an alternative investment. 

 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.

 

Transitions

As I’ve mentioned here before, our commercial real estate practice is centered upon family owned and operated manufacturing and logistics businesses. These companies may lease, or they may own the buildings from which they operate. Common among them, however, is generally a transition is experienced which causes a commercial real estate requirement – the need to sell, lease or buy. Today, I’d like to discuss the five D’s of transition and how locations are impacted.

Death. Recently, we found ourselves engaged to sell a building where the principal of the company had died. This is tough. Taken too soon from his family and business and with a limited amount of planning – after all he died suddenly – some quick decisions had to be made to keep the business viable. After long discussions and many meetings with their CPA, banker, wealth advisor, and attorney – both the business and real estate that housed it were sold. One silver lining when a real estate owner dies is the tax basis is stepped up – meaning the gain when sold is based upon a value at time of death. Therefore, the gains taxes are not quite as severe.

Disposition. Its uncanny how many manufacturing businesses are on the blocks these days. I spoke with ten last week. Two had been sold in 2022 and the other eight are either in serious negotiations, have recently purchased a competitor, or were considering a sale of the enterprise this year. Why you may wonder? Money has been cheap and the same dynamics that govern real estate investing have been felt in the merger and acquisition world. Private equity sees great returns in solidly positioned and profitable small businesses. Each – merger, acquisition, or sale requires real estate decision to be made. Say a competitor is acquired. Chances are they have a facility from which they operate that is redundant. I’ve witnessed this excess capacity jettisoned via a sale or sublease. What if the business is sold and the commercial real estate retained? A lease needs to be negotiated between the new owner (tenant) and the previous business owner.

Debt. As interest rates have spiked over the past few months, companies carrying  revolving lines of credit or term loans that come due are faced with a different rate environment than when the debt was originated. Sometimes the answer to paying off the loan is a sale of the real estate and possibly leasing back the premises.

Dissolution. Dave Ramsey once opined “the only ship that won’t sale is a partnership.” I don’t necessarily agree as I’ve seen many limited partnerships thrive – but I’ve also experienced two or more folks joined through agreements and there is a squabble which leads to a partnership buyout or in the alternative – an outright sale of the buildings.

Divorce. When a marriage ends, husband and wife must divide the assets and go their separate directions. Throw in a family business and a couple of addresses and the split becomes quite complex. When one party demands the settlement proceeds be paid in cash and there is a lack of liquidity – what’s left is a disposition of commercial real estate.
Much of the drama surrounding a “D” can be eliminated with some careful planning and a game of “what if”. You’d be well serve to consult your trusted advisors and plan for any eventuality.

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.

Transfer Taxes

      

      

       We sold two buildings last month in Los Angeles county - Chatsworth to be exact. The deal was lengthy - spanning the horrors of the changing finance market  and Jerome Powell’s ratcheting up of bank borrowing rates. But alas, we got it done, satisfied the buyer’s 1031 exchange, and provided the seller a long term lease from which to operate his business. 
 
Chatsworth, as well as most of the San Fernando Valley cities is considered the city of Los Angeles. For context, imagine if all North Orange County cities of Anaheim, Buena Park, Orange, Placentia, Brea, La Habra and Fullerton weren’t sovereign and were under the purview of say Santa Ana? Yeah. That’s the situation. Consequently, Los Angeles wields tremendous clout when determining taxation - especially in the transfer of real property. 
 
One line item in our estimated closing statement caused the county recorder to pull our file. It seemed the transfer tax was improperly computed - or so they thought. When our able title officer pointed out the correct calculation - which appeared on the deed - the county capitulated and allowed the recording. Never, had I spent so much time understanding how such taxes are determined. My education, I believed was column worthy. But recently, another development in Los Angeles known as Measure ULA or the “mansion tax” - which was passed by voters - encouraged a deeper dive. So here we go. 
 
From the website  https://www.deedclaim.com/california/documentary-transfer-taxes/ - a wonderful resource, BTW - “California’s Documentary Transfer Tax Act allows counties and cities to collect tax on documents that transfer real estate. The Documentary Transfer Tax Act is broadly worded, imposing a tax on: 
 
each deed, instrument, or writing by which any lands, tenements, or other realty sold within the county shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his or their direction, when the consideration or value of the interest or property conveyed (exclusive of the value of any lien or encumbrance remaining thereon at the time of sale) exceeds one hundred dollars …” In reading further, “this language covers almost every interest in property that can be created or transferred under California law. It includes:
·        Outright property transfers;
·        Tenancy in common interest;
·        Joint tenancy interests;
·        Community property interests;
·        Life estates and remainder interests;
·        Long-term leases;
·        Non-temporary easements;
·        Mobile homes installed on permanent foundations.
A transfer of any of these interests is subject to documentary transfer taxes. The documentary transfer tax is due even if the instrument is not recorded in the county real estate records. The creation and delivery of the deed causes the documentary transfer tax to become due.” 
 
Most counties in California impose a transfer tax equal to $1.10 per thousand dollars of value. In addition to the county rate, cities may impose additional documentary transfer taxes. From www.deedclaim.com  “The amount that the city may impose depends on whether the city is a charter city or a general law city. A charter city is a city in which the governing system is defined by the city’s own charter instead of by California law. Charter cities have supreme authority over their municipal affairs and have broad leeway to impose their own tax rates. Many of California’s 121 charter cities have enacted their own tax rates. Cities that are not charter cities are known as general law cities. General law cities may impose a transfer tax equal to one-half of the rate imposed by the county. When the city imposes a tax, the county transfer tax is reduced by the amount of the city’s transfer tax so that the amount that the taxpayer pays remains at 55 cents per $500 of property value or consideration.
 
The website below gives you a breakdown of all the counties and cities in California, which are charter and general law, and the respective transfer taxes. But to save you some reading - Anaheim, Buena Park, Cypress, Huntington Beach, Irvine, Los Alamitos, Newport Beach, Placentia, Santa Ana and Seal Beach are charter cities. The balance of OC is general law. http://www.californiacityfinance.com/PropTransfTaxRates.pdf
 
Now to Measure ULA which recently passed in Los Angeles city. From www.gibsondunn.com “Measure ULA, commonly known as the “mansion tax,” would impose a new “Homelessness and Housing Solutions Tax” on transfers of residential and commercial real property in the city of Los Angeles valued in excess of $5 million.[1]  The revenue raised by the new tax, expected to be between $600 million and $1.1 billion annually, is intended to be used to fund affordable housing and tenant assistance programs.  As of the date of this Client Alert, the measure is ahead in the latest vote count. Under the measure, sales of residential and commercial real property valued at over $5 million but less than $10 million would be subject to an additional tax at the rate of 4%, while sales of properties valued at $10 million or more would be subject to an additional tax at the rate of 5.5%.  The new tax would apply to the entirety of the sale value, not solely the amount in excess of the $5 million and $10 million thresholds, and regardless of whether the property is sold at a gain or a loss.  The thresholds would be adjusted each year based on inflation.  The tax would apply to property sales occurring on or after April 1, 2023. The new tax would be in addition to the existing documentary transfer tax imposed on property sales in the city of Los Angeles, which is imposed at a combined city and county rate of 0.56%.”
 
So what does all of this mean? Selling a property greater than $5,000,000. in Los Angeles just got a lot more expensive. A $10,000,000 property used to cost $56,000 to transfer. Starting April 1, 2023 that same $10,000,000 transfer will be taxed at $606,000 - more than a ten fold increases. And by the way, a $5,000,000 residence is a big deal. A commercial deal in LA will trigger the tax on a very small square footage - affecting many occupants who own their building and choose to sell. But so what? We’re in the OC. Just this. Will unfunded pension liabilities straining city budgets cause city governments to search for revenues to bridge the gap? 10 of the 34 cities within Orange County have charters that allow such an increase in transfer taxes - with voter approval. We will see. 
 
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.

Advice We’re Giving These Days

It’s been said March comes roaring in like a lion and leaves like a lamb. Metaphorical for the weather patterns experienced - this can be said for our commercial real estate market this year.
 
Shaking off the cobwebs of a post pandemic hangover, 2022 started with great momentum - only to be cooled mid year. We received some decent economic news of late with the consumer price index not increasing as fast and some major retailers posting better earnings than expected - but our path forward still remains murky.
 
So what advice are we giving to tenants, investors and occupants who own? Allow me to categorize each.
 
Tenants. We recently recommended a client of ours renew for a short period of time - six months - to gauge the market trajectory. Our tenant is faced with a lease expiration at the end of this year and we’ve been watching what’s become available for several months. His options to relocate were limited and we’d even created a plan B to stay put if we didn’t see some loosening. Low and behold - we noticed a trickle of new buildings hitting the market in October. Now it’s running about three per week. If you’re looking for space - this is a vast improvement versus six months ago when we were lucky to see one every three weeks. Another interesting metric is the asking rates have declined. Gone are the days when a new avail was swept up before it was widely marketed. Every new deal was a new high. Not anymore. Our advice centers around our belief of future softening. Tenants are becoming valuable again - especially if they pay on time and are easy on the building - which our clients is. What’s causing the increase in supply? Some businesses, faced with the new rent structure are headed out of state or out of business. What’s left in their wake are vacancies.
 
Investors. We see two sets of motivation these days - tax deferral and non. Unless motivated by tax reasons - it may be wise to put your money in short term treasuries - two years - and wait for the right opportunity to come along. Institutional capital is largely sidelined and occupants are priced out. Private investors rule. If belief suggests a softening of rents in the face of rising interest rates - values can only decline. Will there be better deals mid 2023 than today? Our opinion is yes. Certainly, if your investment is dictated by tax deferred timeframes - you either transact or pay the gains taxes. But remember, the impetus of those buys was a sale. Our sense is they’ll be fewer equity sales as values have declined or the market’s evaporated - leading to fewer tax fueled purchases.
 
Occupants who own. We saw a voracious appetite from institutional capital targeting these arrangements. Their pitch was a sky high purchase price in return for a leaseback of two-ten years. This activity peaked in June. With the uncertainty of recession, inflation, and rising rates - these deals weren’t as attractive. With more lease deal hitting the multiples - our prediction is some of these owners will need to sell - especially if faced with a refinance bullet or a shortage of dollars necessary to refurbish the building into rent ready condition. Once again. Patience is key.

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.
 

Is Your Real Estate Worth More than Your Company?

Owning the building from which your company operates can be a great deal. After all, the enterprise needs an address from which to transact business. Rent must be paid to someone. Why shouldn’t that someone be you?
 
It generally works like this. A suitable location is identified and negotiations for its purchase commence. Owner occupied financing is originated from the Small Business Administration - the SBA. Banks love this, BTW. Why you may wonder? Under an SBA 504 program, banks only loan 50% of the purchase price. The other half is made up of a government second trust deed of 40% and a ten percent down payment. A lender’s risk is minimized and insulated by the Fed’s involvement.
 
From a buyer standpoint, you’re own for a pittance - only 10% plus points and closing costs. If the resulting mortgage payment - called debt service in a commercial buy - is proximate to market rent, you’re golden!
 
Don’t forget the tax advantages. If structured properly - the ownership entity leases the building to the business. Rent is paid by the occupant to ownership. Bank debt gets paid by the owner. Bingo! Depreciation of the building improvements over 39 years allows a tax break. Expenses related to the operation of the real estate are deducted from the rent. And don’t forget, the real estate appreciates over time.
Meanwhile, the resident - your company - enjoys a stable payment and is protected from market rate swings. It’s a beautiful arrangement.
 
I have many family owned and operated manufacturing and logistics providers whose real estate value far eclipses the worth of the company that lives there. How can this be, you may be wondering? Allow me to walk you through an example.
 
First the real estate. Let’s say your enterprise needed a 50,000 building for its operation. If you purchased between 2000 and 2010, an investment of around $4,000,000 was common. Back then, interest rates were a smidge higher than today as you could borrow 30 fixed residential debt for around 6.25% and ten year treasuries weighed in at between 4 and 4.5%. In contrast the rates today look mighty good! But in the year 2005, if you financed 90% of your $4,000,000 acquisition at 6% - your payment was $27,031 per month. If we add $3300 per month for property taxes, $750 for insurance and $1000 monthly for miscellaneous expenses - your all-in figure was $32,081. If we equate this to a rent per square foot by dividing by the square footage - your cost was $.65. Today, that rental figure is $2.00! Even if you set up the occupant - your company - with a lease that increased by 3% per year - today your figure would be $53,025 or just over $1.00 per square foot. Therefore, because of your smart move in 2005, your company has benefitted from an under market rent for 17 years. Presumably, this delta allowed the operation to function profitably.
 
Now the company. Recall, a business’s worth is a multiple of the profit generated. Sometimes this profit is given a fancy formula called EBITDA or EBIDA and further defined by Investopedia - “EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance and is used as an alternative to net income in some circumstances. EBITDA, however, can be misleading because it does not reflect the cost of capital investments like property, plants, and equipment. This metric also excludes expenses associated with debt by adding back interest expense and taxes to earnings. Nonetheless, it is a more precise measure of corporate performance since it is able to show earnings before the influence of accounting and financial deductions.”
 
Thus, a company paying rent in an owner-occupied scenario would understate its building expenses by almost half. Recall, it’s paying $1.00 per square foot vs a $2.00 market rent. When the profit of the company reflects a market amount, the profit is less and EBIDTA suffers making the company’s value less as well.
 
On the commercial real estate front, values have far eclipsed a 3% annual kicker in rents. Today, a 50,000 square foot building - if you could find one - would be in the $22,000,000 range. A whopping 450% increase over 17 years!
 
Next week, I’ll describe the conundrum created with this imbalance. 
 
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 Should a Due Diligence Package Contain

Due Diligence. Simply, a time frame allotted to a buyer for studying a purchase. Generally, there is no obligation to proceed if something untoward is discovered. Also referred to as a contingency period, a “free look”, or in some cases an option - these 30-75 day periods are chock full of action.
 
As a buyer of commercial real estate, you’ll either occupy the premises or simply collect rent from the tenant. Regardless, your consideration of the buy should revolve around three things - physical, financial, and utility. Physical aspects are things such as as the roof, mechanical systems, construction quality, title, and age. Financial characteristics include the amount of rent the tenant is paying, operating expenses, financeability, and capitalization rate. Finally the utility - can your operation function successfully?, will the property have broad appeal to the next occupant?, and the location.
 
You’ll need to engage some consultants to construct your due diligence package. If you’re lucky - the seller will pass along a good portion of the deliverables. If not, you’ll start from zero. My best example? We once closed a deal in 15 days. Why? The seller had bought the property a year earlier and was able to send us everything we needed to analyze the purchase. So, what will you need?
 
A physical inspection or a property condition assessment
Environmental Phase I - also known as an ESA - environmental site assessment
Mandatory disclosure form
Property information sheet
ALTA survey
Soils, geotechnical information
A preliminary title report
Appraisal - if you’re borrowing money
Existing loan information - if you’re assuming financing
Zoning report
Plans, permits, and approvals
Income and expenses
Rent roll
Copies of leases, and estoppel certificates
Financial information on the tenants and guarantors
Pending litigation
Seismic investigation
Utility bills
Association documents, CC and Rs
 
Once complied, please keep three things in mind when deciding to go forward and complete the transaction.
 
Time frames: Loan approval and the components of that approval - appraisal, environmental, financial take time. In most instances, 45-60 days - if you and your lender are in sync and you provide your lender a complete package of information for your loan approval. Make sure your agreement with the seller allows you adequate time for your loan approval and that you can extend the time frame if needed. While your lender is crunching the numbers, the appraiser is scouting the market for comparable sales, the enviro engineer is reviewing the records of previous hazardous uses; you and your team can busy yourselves conducting the balance of the investigation.
 
Responsibility: Ultimately, the responsibility of analyzing the purchase is yours, but you will want to engage a bevy of consultants to provide reports for you. Your lender will generally hire the appraiser and environmental engineer. But, I would suggest that you have a commercial building inspector check out the building. You probably will want your lawyer to review the title report and discuss with you the most advantageous ownership entity for you. If you are planning to make changes to the building, an architect's guidance is invaluable. The architect can also help you with city permitting and ADA path of travel concerns. Building those new offices or adding a truck loading dock will require a licensed general contractor. Team with one early - maybe have the contractor check out the condition of the building for you as well as the commercial inspector.
 
Recourse: Typically, you conduct your due diligence - loan, property condition, title, permitting, etc. and conclude that you are a go or no go for launch.  Make sure your agreement allows you to cancel the sale, for free, if something is amiss - the property is environmentally contaminated, cannot be financed, is too expensive to improve, or the city will not allow you to occupy the building with your use. 
 
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 Can Loss Teach us about Commercial Real Estate?

Loss. Simply, “the state or feeling of grief when deprived of someone or something of value.” 2020 so far has been a year of loss. Businesses bankrupted, careers cratered, freedoms foregone, routines re-routed, celebrations cancelled - all losses - in some cases forever. Required are we to change - like it or not.

 Last week, our family experienced loss in its most poignant form. Our father, Samuel A. Buchanan Jr. left us to be with the Lord. I’m certain this is true. Dad was a faithful follower of Jesus and loved his church. Suffering from a terrible bout with cancer - fortunately, Dad’s final days were peaceful. He left a legacy of five children, ten grandchildren, nine great grands, and countless friends. I’m sad that Dad is gone but relieved he is no longer in pain. Thank you for allowing me to share that!

 So, what - you may be wondering - does loss have to do with commercial real estate? Only this. From loss comes gain. Here are a few examples.

 2008 ended with many commercial real estate professionals scrambling. Our world abruptly halted. Buyers weren’t buying, sellers refused to sell at such depressed values, and lenders were more frozen than Queen Elsa. Tenants suddenly were seeking great deals. Landlords were stubborn. A mist of uncertainty shrouded our industry akin to that over the Enchanted Forest in Frozen II. Yeah. Recently, I got my Papa cred by watching The Disney Channel with our grandkids. But I digress.

 In 2009, we were forced to adapt. With vacancy in commercial properties rapidly rising, I focused on tenants and buyers. “Blends and extends” became a thing - a reduction in a rental rate today in exchange for a longer lease term. ‘Working out loud” - a phrase coined by my wife, Carla - was the start of a blog in 2010. Authored is digital content for owners and occupants of industrial buildings in Southern California. The Location Advice blog is now published by the Southern California News Group on Sundays. Yep. You’re reading a post now. A return to fundamentals caused the decade of the 2010’s to be my best yet.

 Gains from the losses we’ve experienced in 2020 are starting to sprout. E-commerce has exploded. More folks are shopping from their iPad vs visiting a brick and mortar store. Logistics companies that feed the supply chain are hustling to fulfill demand.

 Material handling outfits - forklifts, racking, dock and door equipment - are recording a record year. Owners of warehouses have enjoyed steady rent checks.

Rumored is a re-shoring of manufacturing. Our economy’s dependence on cheap stuff may shift. Less reliance on low cost production will cause prices to rise but quality and reliability will as well.

 Regional malls could spell the end of our housing crises. How, you might ask? Brookfield Properties made an enormous bet on mall ownership in 2018. Currently, Brookfield is the nation’s second largest owner of regional malls. As we see major mall tenants such as Sears, JC Penney, Neiman Marcus, Macy’s, Pier One, J-Crew, Forever 21, Brooks Brothers and others struggle and fail - watch a gradual re-tooling of these massive spaces into multi-family mixed use re-developments. Closer to home, Integral Communities just bought the land beneath the JC Penney store at the Village in Orange. A similar proposed development is slated for a portion of Main Place Mall. So, it’s happening!

 I’ll always be grateful to my Dad for not hiring me to run the family business. The rejection motivated me to seek an alternate career path - commercial real estate brokerage. What I viewed as an horrendous loss at the time resulted in a huge gain.

 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.

Your Business is in Transition - Now What?

Some commercial real estate transactions - especially involving an occupant buying, selling or leasing - stem from a trigger event. In other words, a change. Simply, the ebbs and flows of economic activity cause a company to re-evaluate its business address.

As I reflect upon the deals I have transacted and what caused them to occur - several situations come to mind:

Last year, three of our import/export clients decided to scrap their expensive warehouse in favor of a third party logistics provider. By doing so, brick and mortar expense and labor costs were saved. Gained was flexibility to meet changing inventory requirements in a “pay as you go” arrangement. However, two of the companies leased their previous spots and one owned. We dealt with the excess with two subleases of the remaining obligations and one move-out and vacant building lease.

Recently, we were engaged for just the opposite. Before, our client shipped his customer’s products directly to the job site - thus eliminating the necessity of storage. Now his customer demanded he stock the items locally for will call. His current operation was maxed. Gotta put ‘em someplace! So, we are in the market for an auxiliary location.

Buying a competitor or selling a business always morphs into space adjustments. Locally, we’ve seen merger and acquisition activity akin to the days of Gordon Gecko. “Greed is good indeed”! 100% of the time - when businesses marry or divorce - redundant real estate results. Now, the Brady Bunch of facilities must be absorbed into one hybrid family. One extreme example - with which we are navigating - involves a manufacturing interest which finds itself with four different parcels - but only needs one.

Occasionally, there is a change in the business owner’s motivation. Retirement, the death of a key employee, a move out of state, or just calling it quits - voluntarily or involuntarily - can portend a different use of commercial real estate or a re-deployment of the building’s equity. Upon the decision to shutter a fifty year old construction company we assisted the owner in selling the old site and re-investing the proceeds into a shiny, fully leased asset that will provide cash flow for years to come.

Let’s not forget a dramatic increase or decrease in sales volume. All manner of accommodation must follow if the current physical plant can’t handle the bump. If on the rise - new equipment and machinery, additional employees, and raw materials must have a place to reside. The counter causes a look at ways to jettison expenses. Yep. One of the biggest liabilities can be rent on a commercial location. A distribution client of ours chose to deal with his increase in business by buying a facility twice the size of his current endeavor. He accomplished two things - space issue solved and no longer does he fund his landlord’s retirement.

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.com.

Cut Out the Broker - Save 6%! Maybe Not

I told the owner of my building, hey if you decide to sell, call me first. I'll buy it and we can avoid paying the 6%". REALLY? This was a conversation I recently heard. I was not eavesdropping, mind you. I was the guest of a network buddy of mine at the monthly meeting of trade organization. The conversation was between my friend and one of his clients - that I had met previously. As I stood there with them - I recalled trying to help him last year with some space issues he was facing - for FREE!

The comment really irked me and I flippantly responded, "yeah, by all means, cut out those greedy brokers!" The client quickly excused himself and walked away. He realized the comment struck a nerve.

I've thought about that encounter a lot over the past week and have tried to imagine myself in his position. If I leased a building and had an opportunity to buy it, would I "cut out the middle man?"

Indulge me and I will attempt to explain why I wouldn't - with full disclosure that I have seen the "end of the movie." By the way, I believe this buyer's sentiment is rooted in the premise that "we didn't find the building or negotiate" the deal - so where is the value? I also believe his position is on widely held by most occupants of commercial real estate.

Here is the value - a commercial real estate professional can anticipate the issues and structure the deal around them or formulate a suitable alternative. This is BEST done before final terms are negotiated, but sometimes, we are shackled.

So let's assume we are talking about a 20,000 sf building, a $4,000,000 purchase - or a $240,000 ($4,000,000 x 6%) dollar savings (potentially). $240,000 represents $12 psf on the square footage of the building. A lot of money for sure! However, if the buyer overpays (based upon market data that brokers track) this "savings" can be consumed quickly.

What if the property doesn't appraise? How does the buyer bridge the gap? Brokers are skilled at solutions due to the market comps, current avails, etc.

What if something "untoward" is discovered - historic hazardous materials, seismic zone, non ADA compliance, unpermitted office or other improvements, a sprinkler system that is inadequate, a lien against title? OK you get the idea. A seasoned professional - has overcome these challenges many times before.

Who will handle the management of the deal's execution - escrow, title, inspections, loan qualification, review of leases, estoppels, etc? A real estate attorney trained at identifying issues - but equipped to resolve them?

What if specialized consultants are needed in the execution process? Buyers can utilize our networks.

So how do you "hear the buyer's concerns?” Remember, the buyer is convinced you are excess baggage.

From experience, I reduce the fee and offer to manage the transaction. Specifically, in return for my involvement, the fee is 1-2%. I justify this because I didn't find the building or negotiate the terms - just like the client believes. But, I can add significant value from the agreement forward to close.

As we know, negotiating the terms is generally the EASY part. The execution is the difficult step. Win win, done!

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.com.

When is a Commercial Real Estate Deal Most Vulnerable?

Akin to those toddlers who taught me lessons recently - a commercial real estate transaction is born and grows up. In effect, it has a life. Every stage is fraught with vulnerability. It starts as a need for more space, a downsize, a move out of state, a consolidation, or a sale where capital gains must be deferred. The end occurs when the new digs are occupied or the exchange is perfected. What happens in between - navigating the process - is column worthy - and where deals are most fragile.

Determining the need. All commercial real estate deals - leases, purchases, investments - begin with a need. If your company just acquired a competitor - chances are - excess locations must be considered - sold, subleased, or occupied. Exponential growth in your revenue may be handled with additional employees, new machinery, or a re-work of your plant’s layout. But - where praytell will the new hires sit if you’re out of space? A deal for another building may be spawned. However, many transactions are squashed at this stage because no move occurs. Another solution arises - additional offices are built in the existing location, new warehouse racking is installed, or a production mezzanine is added.

Deciding on a process. Testing the market of available space will require you to go it alone or engage a commercial real estate professional. If you search Loopnet for what’s available - you may quickly become jaded. The information isn’t as readily available to you as residential data published by Realtor.com or Redfin. Therefore, you’ll need a tour guide - AKA a commercial agent.

Searching. Touring a few vacant buildings may dissuade you from moving. You see - many times “there’s no place like home!” Will a cost savings occur? How about a better efficiency? Double the amount of square footage - is your increased revenue able to handle the bump in rent? Is your purchase down-payment better used in the business vs. buying a building?

Negotiating. Go in too hot - you’ll lose deals. In this owner tilted market - there aren’t that many to lose. If you fail to anticipate the needed time frames for securing financing, achieving city approvals, and checking out the roof, air conditioning, plumbing - and structure accordingly - you’re deal might crater when you request more days.

Executing. Once the paperwork is signed - the fun begins. You must now figure out if you can perform. You’ll have a decent idea - because you will have secured a pre-qualification letter from your bank - and your down payment funds are tucked away in a liquid account. But, unless the seller has provided you with a complete package of due diligence information - Enviro report, building inspection, zoning uses, plans, permits, and operating statements - you must create these reports. Countless deals die on the battlefield of due diligence as something untoward is discovered - the property once housed a landfill, the roof is porous, or the HVAC units are original.

Closing. Once contingencies are waived - a significant deposit is non-refundable. Simply, you cannot walk away without penalty. Do deals die at this stage? Sure - but rarely.

So, when is a commercial real estate deal most vulnerable? The easy answer? Before it closes! However - there is a bit more to dissect - as outlined above.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com

5 Ways to Close your Commercial Real Estate Deal Faster

Two weeks ago - in this space - I discussed the reasons your commercial real estate deal is taking so long to close. As promised - today I will discuss ways to close your commercial real estate deal faster. Our discussion two weeks ago focused upon several areas which I will use as a framework for today’s conversation.

Search. Before you search - give some real thought to all of the solutions to your space needs - staying put and re-working your layout, out sourcing a portion of your operation, taking an additional building from your current owner. Also, engage someone who can assist in zeroing in on precisely how much square footage you need.

Negotiations. In a word - Realistic! If you attempt to scalp an owner these days - you’ll be disappointed. Figure out why you are moving. Will you top line revenue increase by a large percentage? Will you be able to give a key employee a private office and thus increase her efficiency? Will a move translate into cost savings? Are you more proximate to labor or suppliers. When considered through this lens - a few cents per square foot or dollars on the purchase price pales.

Due diligence. As a commercial real estate owner - do yourself a huge favor and prepare your building for sale. Please don’t use your precious marketing time unwisely! Order an inspection so you know what repairs are needed. How’s the roof? Does the property have a rich environmental history? Make the necessary repairs. Disclose the others and price accordingly. Gather all of the pertinent documents a buyer will need to review such as - utility bills, leases, operating statements, insurance, plans, and permits. Stage your building as though it was appearing on an episode of Property Brothers. You’ll be grateful!

Financing. Buyers. Get yourself pre-qualified! I would also suggest choosing a lender, having them do a thorough underwriting of your package and know where your source of funds is originating. Many times in today’s competitive market - without a prequalification - your offer will simply be overlooked for one that is complete.

City approvals. Two suggestions here. The first would be to visit the municipality where you are considering relocating. Ask ask them where they would suggest you locate. The second suggestion would be to hire a person who can help you navigate the various city issues you will encounter.

Transition planning. Moving is expensive, disruptive, and inefficient. While considering your area of re-location – also have a moving and storage company give you a bid on the timing and cost of your move. Armed with the specifics - you’re now equipped to venture into the available space market.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com

What’s Taking So Long with my Deal?

Commercial real estate deals take time to complete - generally, a lot longer than buying your family’s residence. Best case - but rarely? The deal is completed in thirty to forty-five days. More typically? Seasons change with no conclusion to the transaction.

What begins with a simple framework of search, locate, negotiate, contract, execute, and close - many times morphs into a mire of minutiae. Layer in some professional advisors - lawyers, bankers, environmental engineers, accountants, appraisers, building inspectors, contractors and commercial real estate agents - who all must have their say - and the complexity begins.

What - you may ask - takes so long? Indulge me as I describe a few areas where transaction traffic gets pinched akin to your commute on the 405.

Search. Available inventory is at an all-time low. 98 of every 100 industrial buildings is occupied. This is great for owners - but if you’re looking for a place to re-locate your business - you are scrambling to find the right spot. So, if you could simply run out and check a half a dozen sites and choose the best - awesome! The reality is you may wait months for the right match to come along. The days are getting shorter and leaves beginning to turn.

Negotiations. Because of the historically low vacancy - owners are bullish. They understand occupants have very few - if any - choices. High asking prices follow. Motivation migrates. Concessions wane. Couple this with an occupant determined to find a “deal” and negotiations reach an impasse. The clock ticks.

Due diligence. Once you find that dream building and have struck an agreement - you now must figure out if you can buy it. Third party reports must be ordered to investigate all manner of details - appraised value, environmental history, condition of title, roof, air conditioning, structural, seismic, biological, zoning, permitting - to name a few. Normally, transactions are structured with a time-frame to complete these studies - but rarely are the time frames generous enough to allow proper ordering, investigating, reporting, reviewing and approving. One slip in scheduling can cause endless delays and the need to return to the bargaining table to beg for additional time.

Financing. Many small business owners employ the Small Business Administration - SBA - to finance their commercial real estate purchases. Depending upon the size of the loan and lender appetite - two approvals are necessary - one from the bank and the other from the Federal Government. When we experienced our government shutdown last December - SBA loan approvals screeched to a halt. Any loan package not in the approval queue before the hiatus suffered an interminable delay. Great scrutiny is placed upon the environmental health of the real estate and the value as determined by an appraisal. Unfortunately, you and your purchase operate on the loan’s timeframe.

City approvals. The use to which the property will be placed as well as any changes planned - office, power, warehouse racking, freezer cooler space - will need to be vetted and approved by the municipality. We once encountered a city approval process that eclipsed a year! This year - by the way - after leases were signed. Fortunately, we anticipated the approval timing and were able to negotiate a satisfactory structure.

Transition planning. Moving a manufacturing plant can be a bit more involved than packing your household belongings. Pair the complexity of the relocation with the inability to be “out of business” for any duration and planing becomes tantamount.

Please tune in next week as I’ll provide some suggestions to roll back Father Time and expedite your deals.

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.com.