Five reasons why companies relocate

I  provide location advice to owners and occupants of industrial buildings in southern California. I have discovered that a company's decision to relocate is generally for one or more of the following five reasons: rent savings, a chance to own, a better location or facility, an up size or downsize, or achieving a better efficiency. I will use real examples to illustrate each of the five reasons. Thanks to the occupants that are featured here that have allowed me to represent them over the years!

Rent Savings:

Over the past three years, companies have been able to achieve rent savings without moving. The strategy was quite simple...ask the building owner for a rent reduction in return for an extended term. Owners were willing to accommodate occupants in order to avoid a vacancy and the cost to originate new leases. I posted about the cost of originating a new lease recently and you can read the post by clicking here. As the market starts to recover, these "blend and extend" lease extensions become less prevalent and in order to achieve rent savings, a company must downsize, move to a cheaper area, or a cheaper building...one with fewer amenities or with some functional obsolescence. IAS Industries, Raymond Handling Solutions, and King-Tek EDM all three benefited from renewing leases in exchange for lower rent. KLS Doors relocated to a newer, larger building for cheaper rent as did Advantage Adhesives.

A Chance to Own:
Assuming a company possesses the characteristics of a company that should own, the environment for purchase over the past three years has been a "perfect storm" of record low interest rates and motivated pricing. Should your company consider ownership? You can read the post here which outlines the criteria. We recently represented a chiropractor, Dr. Kang, of Zen Care Wellness, who purchased a shell medical office from a lender. The Dr.'s existing landlord was the Irvine Company...who rarely sells assets. Consequently, the Dr.'s only chance to own was to relocate. Once in, Dr. Kang's debt service was about the same as he paid in rent at the previous location...a net savings once tax benefits and future appreciation are considered. My favorite example was a deal that my client Raymond Handling Solutions recently accomplished in Las Vegas. They now own, have more space (in a brand new building), and have income from an adjacent building that was a part of the purchase...truly unbelievable!

A Better Location or Facility:
A flight to quality has been a big motivator recently. Our client, Limbach Facility Services sold their obsolete building in Compton in 2005 and leased the building back from the new owner for five years. When the lease expiration was approaching, Limbach engaged us to locate a facility with a better image and a more prestigious location. Both objectives were achieved at the new home in Garden Grove, California. Limbach's landlord, Kilroy Realty is thrilled to have them as a tenant.

An Upsize or Downsize:
Companies are bought and sold, business ebbs and flows, employees are added, products lines are discontinued, etc. All of the above can necessitate a relocation. Our client, DMG, has outgrown their current facility and have "band-aided" the company's growth by leasing expansion space down the street. This has created a need for a larger building. We have been engaged to assist DMG in the sale of their existing building and the purchase of an "up leg" larger facility. Our client, Direct List Technology downsized over the years because their need for space based upon "space consuming" computers became smaller and smaller as the computers and printers became smaller and smaller. DLT discovered that they could generate similar revenue in less real estate.

Achieving a Better Efficiency:
Prior to King Tek EDM's "blend and extend" referenced above, they relocated to their present facility and signed a four year lease. I believe the short clip below illustrates King-Tek's situation prior to their move. They occupied seven different units in a multi tenant building and were experiencing tremendous operational inefficiencies...thus the relocation to a single freestanding building.

I Sold (or am selling) my Business...now what?

I provide location advice to owners and to occupants of industrial buildings in Southern California. The media today is filled with news of mergers and acquisitions...probably more so than anytime since the middle of the 2000s. This trend is witnessed by business owners big and small. So let's explore the circumstance of a sold (or soon to be) business and the disposition of the location(s) that the business occupies. As my commercial real estate practice centers around industrial properties, I will assume that the occupant is a manufacturing or distribution company. In order to frame my discussion, I will look at three scenarios of location disposition...business sold, location is leased long term (more that two years); business sold, location is leased short term (fewer than two years); business sold and location owned by the business owner.


Business sold, location is leased long term: Chances are that the purchaser of your business considered the location and the remaining term of the lease. If the purchaser opts to occupy the location, generally, an assignment of the lease obligation should be requested. Any options to extend are personal and typically cannot be assigned, however. Also check and see if any personal guarantees of the lease's performance can be vacated. Generally owners of locations want as much security as possible in the performance of the lease, however, if the purchasing entity has a larger net worth, sometimes owners will vacate previous personal guarantees. If the purchaser does not intend to occupy the location, you as the occupant must deal with a term of lease that must be satisfied...without the benenfit of a business to generate income. Some owners are happy to work with an occupant that is paying a rate substantially below market. This hasn't been the case for several years as lease rates have declined. Please address the lease term (and the resposibility for it) in your letter of intent.

Business sold, location is leased short term: This can be tricky if the owner of the location believes that the occupant has such an investment (distributed power, AQMD permits, ISO 9002 permits, paint spray booths, offices, freezer/cooler space, conveyor systems, etc.) in the location that moving would be too costly. The owner may attempt to negotiate a higher than market rate assuming that a move would be too costly. Be well advised to determine the buyer's desire to stay in the location and attempt to negotiate an extension. Otherwise, your buyer may negotiate a lower price for your business based upon the uncertainty of the occupancy.

Business sold, location is owned by the business owner: Frequently in closely held businesses, owning your location can make a great deal of sense. You fix your location costs and you control the occupant (it is your company), you benefit from the location's appreciation, and there are some potential tax benefits individually. I explained in great detail the characteristics of a company that should own its location in a previous post. You can click here if you are interested in learning more about those characteristics. When you sell the business that occupies the location (even if the purchaser of your business signs a lease with you), the question you ask should be, would I want to own this location if it were vacant? Remember when you were the occupant and the owner, the dynamic is different than being the owner but not the occupant. You are now an investor who must compete with many other investors for your tenant's occupancy...are you prepared for that potential risk? As explained in a previous post, the cost of originating a new lease is staggering. If the answer is no, then there are steps that you can take to minimize the risk of owning a vacant building. First, analyze your location's monthly carrying costs...debt service, taxes, insurance, common area maintenance, miscellaneous maintenance, etc. You should maintain a 9-12 month cash reserve of this total amount. Second, determine how marketable the vacant location is. A location advisor familiar with the current market can provide this for you. How many vacant locations similar to yours exist? What is the current appetite (including market time) for such a location? What is the current vacancy rate for locations such as yours?...like yours specifically...not a market wide vacancy of all locations. How special purpose is my location? Third, determine what the location is worth to an arm's length investor with the new lease. This amount less any debt owed against the location and less any closing costs of sale (net of any taxes) determines the proceeds that can be deployed into an alternate investment. If you choose to deploy the funds into another real estate investment, the gain may be tax deferred if the upleg purchase meets certain criteria. You may be wondering why you would sell one piece of real estate only to buy another? The simple answer is to lessen the risk. By selling a special purpose single tenant location and investing in a general purpose multi tenant location, the management is greater but the downside is more  manageable...ala selling stock in a single company and buying a mutual fund of many companies.

Pay attention to the disposition of your location(s) and you will be glad that you did!

Five "Gotcha" Issues that All Occupants Should Negotiate

I provide Location Advice to owners and occupants of industrial buildings in Southern California. Approximately 3/4 of my activity is in leasing and lease renegotiation...either on behalf of a landlord (owner) or tenant (occupant). In my experience there at least five "gotcha" issues that should be addressed in any lease agreement. In my layman's opinion, The AIR lease addresses these issues quite thoroughly...with a few tweaks. In the case of an owner generated lease, the issues vary in their treatment. The five issues are: Operating Expenses; Capital Expenditures; Subordination, Non-Disturbance, and Attornment (SNDA); Rent Increases, and Miscellaneous. I will define each issue, and suggest "asks" during the lease negotiation. This is a layman's review as a CRE practitioner and should not alleviate the need to have all legal documents reviewed by counsel. These issues are from a California perspective and may vary by state.

Operating Expenses (Industrial):

Operating expenses, also known as Op Exes are the expenses that an owner incurs in the operation of a property. These expenses include, but may not be limited to, property taxes; property insurance; maintenance of the foundation, roof, and walls; landscape maintenance; maintenance of the building's systems...plumbing, electrical, HVAC, etc.; utilities; occupants share of the amortized capital expenditures, etc. The costs are sometimes referred to as NNN expenses or "gross-ups". These expenses vary greatly based upon an owner's management preferences but are largely skewed by the amount of property taxes. If you negotiate a NNN lease, the costs are paid in addition to your rent...either as due or monthly. If the lease is an industrial gross lease, the base year op exes are included in the base rent. I suggest postponing the base year until the first full year after the commencement of the lease. If the lease commences in February, this is a tough ask. If the lease commences in October...not so much. I suggest asking for a cap on the increases in op exes over the base year.

Capital Expenditures:

Capital Expenditures are expenses that are largely non recurring such as roof replacement, parking lot replacement, drive and landscape modifications, etc. I suggest there be a mechanism in the lease to specify that any expense that exceeds 50% of the cost to replace a capital system (roof), be the responsibility of the owner and the cost be amortized over 12 years at an agreeable rate of interest.

Subordination, Non Disturbance, and Attornment:

This is defined as the financing holder's means of securing their interest and the outcome of any foreclosure. Also known as an SNDA, this clause causes the lease to be subordinate to existing and future financing that is placed on the property. As a tenant, a request that the lease be non-disturbed (terms not modified), should be sought in return that the tenant agrees to attorn (recognize) an owner that becomes the owner through the foreclosure of the underlying debt. Requiring ALL of these is important in my opinion...especially during economic times that could suggest a high likelihood of foreclosure. I suggest that the lease clearly provide for ALL of the components...S, ND, and A, and that where possible the lender be persuaded to sign an SNDA recognizing the lease.

Rent Increases:

These are defined as increases in the rental schedule during the term of the lease. Generally the increases are throughout the term of the lease and could vary based upon the change that occurs in the CPI or some other index. Caps and Floors are always suggested to hedge against a rampant inflationary increase.

Miscellaneous:

Former and existing cabling removal, ADA requirements (and who is responsible), city permitting, subleasing and assigning, rent abatement vs FREE rent, and options to extend and purchase should all be carefully vetted and when necessary, negotiated.