How to Become a Commercial Real Estate Legend? Simple! R.I.P. Bill Lee

The Commercial Real Estate Industry lost a lion this week. Bill Lee passed away peacefully on April 5, 2021 surrounded by family. We are deeply saddened by our loss but grateful that Bill suffers no more and is with the Lord. Many of you knew Bill, transacted deals with him, and had great respect for his prowess. In honor of the life Bill led and the impact he had on our business - I revived a column I wrote in 2019 in his honor. Rest well my friend!
 
I am penning this post from a palatial suite - not the font seat of my car, btw - at the Aria in Las Vegas. It's early and I am one of the few that is witnessing the sunrise at the BEGINNING of my day. My company, Lee & Associates, journeys to Las Vegas each fall for our annual Summit. My thoughts drifted to a Summit past - the last one Bill Lee attended.
 
At that Summit - I re-connected with my old friend - Bill - hint, his name is on the front door. It was so great to see Bill and spend some time with him. Bill, unfortunately has been absent from recent Summits. I REALLY miss him. The cool thing is, it felt as though we talk weekly. He watches my TUESDAY Traffic Tips - my weekly video series - and complimented my work. Bill is LEGENDARY. But, how did he become a legend?
 
Bill observed a problem. Bill was the top guy at Grubb and Ellis before Nixon was a crook. He was/is the most competitive guy I've ever met. But, Bill realized that intra-office competition was wreaking havoc on the greater good of the office. Bill tells it like this. "I had a 30,000 sf listing. A guy (competitor) in the cube next to me had a 30,000 sf occupant requirement. I didn't tell him about my listing because I didn't want him to get part of the fee. The culture of the office dictated that approach." Bill later realized that the "company" suffered and created a platform, that through profit sharing, rewards cooperation but still encourages competition. This was heady stuff, folks. Talk about disrupting the way in which commercial real estate is brokered. WOW!
 
Bill had the courage to change. Great, there was a problem. Now, Bill had to convince some fellow brokers that CHANGE was the key to their collective future. Getting brokers to change ANYTHING is tantamount to separating conjoined twins. But, Bill, ever the persuader, convinced a small band of brothers to follow him into the cooperative abyss. John Matus, John Sullivan, Mel Koich, Larry O'Brien, John Vogt, Tom Casey, Dennis Highland, Len Santoro, Bart Pitzer, and Bill's college friend, Al Fabiano heeded the siren call and left the building. 
 
Bill had a tireless vision. One of the other old timers and I were marveling at how those eleven guys, in an executive suite in El Toro, California, created a company that now boasts 65 global offices, close to 1200 agents, Billions in revenue, an International presence, coast to coast visibility, and the BEST place in the world to transact commercial real estate. Period! I asked Bill if he ever, in his wildest dreams, believed the company would someday be this big. He looked at me rather puzzled and said, "of course! Once we got your Orange, California office opened, I knew we were on our way to becoming an international company." Tireless vision!
 
Bill got out of the way. At a point, Bill realized that for Lee & Associates to grow, he needed to step away and let the eaglet fly. Knowing Bill, as I do, this was warranted but was the toughest thing for him to accomplish. 
 
Bill along with Craig Coppola, a recent William J. Lee lifetime achievement winner, have authored a book entitled Chasing Excellence, Real Life Stories from the Streets. It is available on line and in book stores.
 
So, want to become a LEGEND? Just do those four things. Simple, right?
 
 
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.

10 Things to Seek in Lease Negotiations

As commercial real estate professionals - a portion of our day is consumed negotiating leases. These can be renewals - someone stays put; or new deals - which are triggered by a relocation. Depending upon your specialty, up to 90% of your time is spent in lease endeavors. Compare this to a residential agent and you find the opposite - 90% in the sale of homes vs the lease of homes. So, with so much of a commercial real estate broker’s bandwidth filled with lease conversations - we get pretty good at the “ask”. In other words, what to seek from a landlord. If you find yourself in the midst of such a back and forth - consider the points below.
 
Rental rate. Folks in the business speak in terms of per square foot. You’re most likely concerned with the size of the check you write each month. Regardless, both are important. Why? Prices per square foot provide a benchmark by which alternatives can be compared. And, the total allows you to determine affordability. Your rent will be net of operating expenses (known as a Triple Net, NNN, or modified net figure) or included within the sum (Gross, Full Service, Modified, or Industrial Gross). Each has its pros and cons. Make sure your professional explains.
 
Term. Your enterprise is committing to lease the premises for a period of time. Generally, the smaller the space - the shorter the term. As an example, incubator locations - fewer than 5000 square feet - are month-to-month to two years whereas a 250,000 logistics hub might carry a 10-15 year arrangement.
 
Increases. Unfortunately, your rent will increase throughout the period of your tenancy. In theory, these are tied to inflation. But, with inflation all but flat - a bump of 3-3.5% per year is standard. The crazy thing is - rents have increased far in excess of 5% per year for the past two years.
 
Tenant Improvements. Generally, a TI will fall into one of two categories - special purpose or general purpose. Think of the former like a chef’s kitchen for your home. Sure, you may require a 12 burner Viking range but will the next occupant find value. If the answer is no, most owners won’t spring for it. Conversely, an upgrade of the power that feeds the plant will appeal to the next resident. Therefore, you may find a willingness to participate in the expense.
 
Refurbishment. Typically - paint, carpet, flooring and cleanup. Depending upon how recently the landlord rolled over a tenant - refurbishment may be more involved.
 
Extension Rights. Relocating is expensive, time consuming, disruptive, and inefficient. Therefore, in addition to the initial term of your lease - consider requesting an ability to stay past the expiration. Also known as “options to extend” - your tenancy is preserved if you decide to exercise.
 
Options to buy. Rarer today than an open amusement park, options to buy are a concession frequently sought by a prospective tenant and seldom given by an owner. Ask away. Expect the answer to be - ummmm, no.
 
Opt-outs. Seen this year with office leases - where space need uncertainty prevails - flexibility is achieved. Given is the right to walk away before the lease term expires. If a parcel holder agrees, expect there to be a penalty.
 
Free or abated rent. The difference? Free is Free and can’t be clawed back if you default - whereas abated can be. Some relief - in either flavor - can ease the expense of a move.
 
Form of lease. Finally, your agreement will but placed into a contract for both parties to sign. This becomes the document from which rules are noted, obligations created and a mechanism for settling disagreements outlined. Therefore, the form is critically important - so make sure you know what the owner is proposing and seek counsel.
 
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.

Shortage of Inventory? No Problem

There is an acute lack of available buildings for lease and sale in Orange County and the Inland Empire. In most cities and size ranges, 98 to 99 of every 100 spaces is occupied. The culprits? Lack of new construction, exponential growth of industrial operations, and increased competition from well funded investors. In short, demand outstrips supply and has for several years. This time last year - when a pandemic fueled pause persisted - we believed the end to shortages was finally near. But alas, in June of 2020, the turbo charged appetite for manufacturing and logistics locations voraciously returned.
 
But, there are ways to creatively solve the dilemma. Below, are just a few.
 
If you’re looking to buy, consider leasing. Currently, we represent a well qualified buyer looking to purchase 200,000 square feet in the IE. Alternatives to buy are rarer than Elvis sightings. A quick scan of the multiples yields fewer availabilities than digits on your left hand. However, a similar survey of lease options is brighter with several more choices. Sure. With a lease you pay rent to another when you could be funding your retirement - but at least your revenue will grow in the larger building. Once your lease terms out - consider re-entering the buying fray.
 
If you’re looking to lease, consider buying. Our food processing client is having a bear of a time locating a facility to lease. Ideally, the spot will have some of the special purpose goodies he needs - floor drains, washable walls, and substantial power. Slim pickings! However, we did source a prime deal for him to buy. We can couple our tenant with an investor who can buy the building, construct a long term lease and voila - everyone wins!
 
Make unsolicited proposals. Occasionally, we will find a gem by panning for gold. Be aware - offering on a property not on the market is inefficient. Generally, there is little room for negotiation. Sellers have not fully considered the tax impact. Third party reports such as inspections, surveys, environmental, and appraisal must be generated. Finally, motivation to sell is strictly based upon the price you offer. Any variance from your offered price - if you discover something wrong - will be met with a resounding no. We have found a few sale opportunities by scanning buildings for lease. The math of selling a vacancy vs waiting for a tenant can sometimes make sense.
 
Wiggle, wiggle, make it work. My wife is a seamstress. In the past, she taught countless young folks to sew. One of her sayings was “wiggle, wiggle make it work” when shoring up a pattern. If you look at your current setting, additional square footage may be found. How wide are the aisles in your warehouse? If you slim them down to “very narrow” - you multiply the capacity. Are you maximizing the cube of your space? By stacking higher - this is accomplished. I’ve seen some very cool production mezzanines which double your floor space. If you have no place to put that new injection molding machine - consider a mezzanine.
 
Find the soft spot. Recently, we completed a deal with a logistics company. When all of their musts were identified - nothing was available to tour. The reason? Required was more office space than the typical warehouse building sported. Our solution was to separate the office need from the operation. We found a plethora of available suites close to the mother ship.
 
Outsource! People, inventory, machinery. Generally, these three drive increased revenue - and require more space - albeit different types. Folks require an air conditioned, carpeted office. Inventory? Racking and stacking. That new CNC machine that cranks out parts needs floor space. A careful dissection of the increased enterprise is in order. Will the business be generated by a larger sales force? Maybe a virtual group could be considered. Factory reps do this sort of work. For finished goods that need a place to rest - many of our clients use a third party logistics provider for the ebb and flow of warehousing. Avoided is a long term commitment to square footage. Have you considered using another producer to manufacture for you? Until you scale and the cost benefits level - you can produce more without the investment in machinery and the need for a place in your plant.
 
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.

Reconciling Operating Expenses

Today, we venture into the weeds to discuss an event that occurs this time of year. Nope. Not Chinese New Year - which is cool, by the way. But, that of reconciling operating expenses including common area maintenance charges. Fun stuff - huh? Generally, this proceeds with occupants of commercial real estate who do not own their building. In other words, tenants. You see lessees have contracts with landlords - also known as leases, rental agreements, or the like. Contained within each understanding is an outline of such things as base rent, commencement, expiration, rental increases, and responsibility for mowing the grass and fixing a leaky roof. It’s VERY important you - or someone within your group - understand how each of these cost categories is handled.
 
Typically, leases call for you - as the resident - to pay for expenses related to the operation of your address. If your company occupies a suite of offices - most likely you executed a Full Service Gross lease. Similar to other Gross Leases, a FSG lease lays out a rate inclusive of rent, property taxes, insurance for the premises, and general exterior maintenance. Unique to this arrangement is a charge for utilities and janitorial services which are baked into the monthly check you write. If you consider a high rise building with many enterprises - there is a prorata sharing of electricity, water, trash, and the crew that vacuums your conference room in your absence. It would be impractical to contract separately for these services - so owners don’t. Most, however, include an Expense Stop. Simply, anything above is billed to you. Below, base tent takes care of it. More on this in a moment.
 
Industrial landlords take a slightly different approach to re-capture costs. As an occupant of a manufacturing, warehouse, or service building - your lease probably is a TRIPLE Net Lease or an INDUSTRIAL Gross Lease. The main difference here? Rent with a NNN Lease excludes operating expenses with your monthly payment whereas an Industrial Gross Lease lumps them together. Am I saying no expenses are passed along in a NNN arrangement? Quite the contrary. They are invoiced as they occur or annualized and collected monthly.
 
So with that preamble - let’s get to the meat, shall we?
 
Each year between October and December, owners of commercial real estate budget for the following year. Taken into account are such line items as rent, property taxes, insurance, and yes - common area expenses like parking lot sweeping, trash collection, landscape maintenance, and system repairs. Considered? Is a vacancy anticipated? Are lease term extensions expected? Reviewed is how the current year fared. Were expenses properly predicted or dramatically overstated? Next, will the gardener charge us more next year? Have insurance coverages been impacted by a hurricane in South Texas? We know property taxes will increase by 2% unless a change of ownership occurred. Once calculated - a projection of next year’s - starting in January - plus budgeted expenses is forwarded.
 
You may be wondering - what happens if the principal collected too much money this year? Ahhh. That is where the February reconciliation begins. Akin to sending Uncle Sam too many tax dollars in anticipation of a refund - an accounting of charges collected vs realized is accomplished. If you paid too much - expect a bonus from your landlord. Conversely, an underpayment will foster a note that you owe more. Please understand. You have full rights to request backup information on anything for which your owner seeks payment. Typical would be a request for documentation outlining why a winds in Texas would affect a California insurance premium. Or why did trimming the trees cost so much.
 
Finally, the “more on this in a moment” promise. Delve into the terms - Base Year and Expense Stops which Full Service Gross and Industrial Gross leases highlight. Simply, these clauses limit the amount of common area expenses an owner can recover.
 
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

SOLUTIONS for Your Commercial Real Estate Requirement

A couple of weeks ago, we discussed a system for analyzing an investment property, commercial lease, or potential building purchase,. Known as the acronym - FOCUS - I deferred our conversation on the S - Solution step - as the final letter of itself was column worthy. As you may recall, the F stands for Facts, O for Opportunity, C - Consequence, and U - Understanding. If you missed the missive and would like to check it out - you may do so here. 
 
Solutions may splinter into several directions. However, they generally fall into one of three categories - do nothing, do something, or defer a decision. Simply, if you’ve sold an income property, have used the FOCUS approach to determine your next move, and are to the Solution step - you may choose to pay the gains (do nothing), purchase another asset (do something), or wait (defer).
 
As you approach an expiring lease - the process could suggest you renew your lease (do nothing), relocate into a new address (do something), or allow the contract to expire and hope your owner doesn’t force you to vacate. By the way - with today’s obscenely low vacancies - I’d not suggest doing this. 
 
A lessee considering a purchase could opt to renew the leased premises (do nothing), pull the trigger on the buy (do something), or wait until the nutty prices level (defer).
 
Unfortunately, Solutions are rarely as straight forward as outlined above. 
 
Using our income property sale situation - hours of analysis precede the Solution. Doing nothing and paying the taxes owed appears simple. But, when you consider Uncle Sam and Cousin Gavin will clip an enormous chunk of your profit - this may pale in comparison to another route. Doing something - by affecting a tax deferred purchase and buying another parcel comes with myriad complexities. First, you must decide to do this before your sale closes. Next there are finite time frames guiding your acquisition. And don’t forget. You MUST find something! Sellers are bullish. The pool of suitable offerings is limited. As Tom Petty crooned - “the waiting is the hardest part”. Deferring a decision - if you sell an income property - forces you into the “Do Nothing” mode. If you close without designating your desire to exchange - you lose the option. A fat tax bill awaits.
 
Now, let’s take the example of an expiring lease. Sure. You could elect to find a new spot. In effect “do something”. But the thinking behind the decision warrants some dissection. Frequently we meet with a tenant and hear - “once our lease expires, we will DEFINITELY RELOCATE!” But, these days the majority of occupants don’t. After careful consideration, most realize renewing an existing lease has many benefits - an expensive move is avoided, disruption is nullified, and downtime is erased. The industrial real estate market suffers from an acute lack of available spaces. In some size ranges, our vacancy is zero! Your fine intention to upgrade into a newer facility might be met with very limited choices - and costly at that. Finally, some just cannot pivot into a new address. Generally, we see as motivators such things as - custom improvements, special permitting, or an irreplaceable area.
 
A direction to purchase your business home and pay rent to yourself is a sound plan - sometimes. Doing nothing means you’ll stay, continue to rent, and run your business with little change. Hopping into a purchase - doing something - would require you to survey the market, get yourself approved for financing or tap your piggy bank, and execute a transaction. Don’t forget to look into the “true cost of ownership” by adding - mortgage payments, property taxes, insurance, and some little things like maintenance. It’s generally much cheaper to lease. Oh yeah. Your down payment isn’t free - even if it’s in a liquid account. You could choose to hire, invest in machinery, or open a new market with the cash. In some cases, these alternate investments yield bigger returns than buying a building. Deferring until our pricing settles could make sense. My opinion is we’re long overdue for a correction. But, so far, even a Pandemic hasn’t stalled the upward march.
 
Sometimes FOCUSing on the Solution is tough! 
 
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.

Making a Commercial Real Estate Decision Requires FOCUS!

As a frequent reader of this column, you know how much I like acronyms! You may have seen my missives on NUCLEAR, ask MR BOB, and even one from my friend and neighbor, Rudy - CLIP. Acronyms and their sister, nemonic devices, got me through school - somewhat unscathed - as they train your mind to remember lists and/or a process. Today. Yep! Another one. Proper attribution must be given to my business coach, Rod Santomassimo of the Massimo Group for this sequence. If you’d like to learn more - he’s written a great book entitled Knowing Isn’t Doing - Don’t Kid Yourself. If you’re facing a commercial real estate decision - specifically a relocation - I’d suggest you run down the list and ask yourself a few questions. In other words FOCUS!

F. Facts. Your current location as an owner or an occupant of commercial real estate contains a set of knowns - facts. You been at your location for a period of time. You lease. You own, etc. Layer in such things as the expiration of your rental agreement or a loan maturity. Consider the drivers of your business and how those may have changed. Was a competitor acquired? Did you add employees or machinery since you moved in? By the way. At this point - you may already have a direction. Humor me. Work yourself through the balance of the exercise. Sometimes - results may vary. 

O. Opportunity. Let’s now carefully delve into what’s working with the building and importantly, what’s not. Examples of what’s working could be - your customers know where you are, freeway frontage provides free advertising, or the lease rate you negotiated is 20% below the market rates. However, if the spot causes your employees to park down the street or if your warehouse must be completely unloaded and reloaded so folks can work - those are problems. You may also want to give some reflection to the motivators when you leased or bought the real estate. Was the market on fire and you took what you could get with the promise of re-evaluation? 

C. Consequence. Simply. You’ll need to do some math here. Consider what happens if you do nothing vs something - in dollars and cents. We recently counseled a logistics company. Considered was converting a leased premise to an owned one with a lot more space. Clearly, the new digs were going to cost a great deal more. However, the downside of staying put and continuing to lease would cripple their ability to grow their business. The loss of revenue - by standing pat - was enormous. 

U. Understanding. Now you know your situation, have dived into what’s working or not, and have calculated the monetary impact of your options. All that remains is a road map. Proceed to the next step. 

S. Solution. As the solution is column worthy itself - you’ll have to tune in next week for some suggestions. 

So, please don’t lose FOCUS this week until we meet again. 

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.

Look Beneath the Surface for the TRUE Story

We’ve been blessed with five grandchildren - two of whom live within walking distance. We see them often. It’s AWESOME! Our oldest is obsessed with the history of the Titanic. Go figure. Suffice to say we’ve become quite expert on the pitfalls of icebergs. As yet another documentary was consumed last night - my thoughts veered - sorry - to commercial real estate. Not the disaster part but the iceberg part. You see, what’s happening currently with industrial real estate is akin to those floating behemoths of frozen H2O - if you can’t see below the surface - you’ll miss 80% of the market’s activity.

 
If we take a look at north Orange County, California which includes the cities of Anaheim, Placentia, Yorba Linda, Brea, Fullerton, Orange - and throw in East Yorba Linda, AKA Corona - for good measure - you will find a startling lack of available Class A buildings. And by Class A, I’m referring to those constructed since 2010. Many of these cities have ZERO availabilities above 100,000 square feet. What’s special about Class A you may be wondering? Well, new inventory comes equipped with several goodies - such as taller ceilings, more powerful fire suppression, and greater truck access. Might I mention ALL of these goodies are needed for the eCommerce occupants that stack and ship things. One of the advantages enjoyed by the Inland Empire? There are still large swaths of land to be developed into concrete monsters and the existing buildings are newer. So what? Inland Empire lease rates are quickly surpassing those of North Orange County - especially if it’s a Class A building in Ontario vs a Class C in Anaheim. Occupants are paying for image and quality. So what if they drive a hit farther. Their business run so much more efficiently.

So how about what’s happening beneath the waves, so to speak? Developers are voraciously gobbling campuses of industrial buildings formerly housing manufacturing entities. We saw this begin around 2003 and continue with a vengeance through 2008. Oops. Minor reset! Then commence again around 2014. Panattoni Development’s re-tool of the Boeing campus in East Anaheim was spectacular! A wonderful mix of quality manufacturing and logistics buildings was delivered over several phases. Even Disney re-located their costume operation to the project. 

Beckman in Fullerton must also be mentioned. If you’re ever in the neighborhood of Harbor and Lambert - take a look. You’ll be impressed! Western Realco created a masterful layout of logistics spaces which engendered great appeal and demand. 

But over the last six months - acquisition activity has been turbo-charged! A former National Oilwell Varco site in Brea will soon house a gorgeous 108,000 square foot development. Part of the former Mitsubishi holdings in Cypress will be re-developed by scraping some existing buildings and leaving some more on the 22 acre parcel. Kimberly Clark’s operation - formerly located on Orangethorpe in Fullerton could very soon be the home of your favorite warehouse operation. Planned are several large boxes for that site. Finally, that location you pass on the 91 Freeway - Universal Alloys? Yep. Slated for a new development. 

The landscape of available Class A inventory should change dramatically over the next twelve months. It will be curious to see if any of the buildings actually hit the market - or if they are simply pre-leased. I’m betting on the latter. 

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.