Today, I decided it would be fun to regurgitate a few random thoughts as they pertain to LEASING commercial real estate.
As we have discussed before, leasing is a big part of our daily activity - unlike our residential counterparts. We, as commercial real estate professionals help occupants find space to lease or buy.
Typically, leases account for 70-75% of our deal volume - sales the balance.
We differ from our residential counterparts. Our fees are based on a percentage of the deal's total consideration - purchase price or the amount of rent paid over the term of the lease. Generally, commercial leases run 3-10 years - so the amount of rent payments negotiated is a significant sum. Whereas, residential leases are month-to-month or a year maximum. Consequently, the potential fees on a residential lease - because the term is much shorter - make it unprofitable for residential agents to pursue.
Subleases are a pain. A sublease is necessary when an occupant no longer needs the building - for myriad reasons - yet has a term of lease remaining. The owner of the building still wants his rent. So, the occupant resorts to finding a substitute - a subtenant - to move in and assume the rent payments. Differences in uses, credit, number of players, and changing market conditions all create the pain in a sublease transaction.
Credit requirements of a property owner. At a minimum, the owner will look at the total amount of the lease - let's assume $10,000 per month for sixty months or $600,000. The owner is leasing an occupant the building in return for $600,000 in rent payments. Therefore, the owner is extending the occupant $600,000 of credit - so to speak. Carefully scrutinized is the occupant's ability to repay the $600,000 - through an analysis of the business's sales and credit history.
Process. Searching for a space to lease is similar to searching for a building to buy. The similarities: Facility requirements are discussed - loading, power, amount of office space, warehouse ceiling height, etc., geographical areas are considered, a list of alternatives is toured and a candidate is chosen. Now, the differences occur. A sale deal will proceed to a negotiation, an agreement, an escrow, due diligence and closing - approximately 60-90 days. But, a lease will involve a negotiation and a lease - much quicker - fewer than 30 days, in most cases.
If ever we can assist you in leasing or buying a building, please call us at 714.564.7104 or email us at abuchanan@lee-associates.com.
Friday, October 27, 2017
Friday, October 20, 2017
Commercial Real Estate Sale Leasebacks - the DOWNSIDE
I've advised a number of my clients recently to consider selling their commercial real estate and striking a three to ten year lease with the investor that buys it. A few have listened.
This structure, in our parlance, is known as a sale leaseback. Different than a straight lease and not a short term lease that accommodates a purchase, a sale leaseback allows an owner occupant the chance to sell at today's high prices and remain in the building - albeit as a tenant - and avoid a move.
It's a slick arrangement when the correct motivations are involved. I wrote about those reasons in a past post. You can read about it here.
Today, I want to spend a moment and discuss the downside of a sale leaseback.
The message it sends to the market. When a sale leaseback is listed and marketed for sale, the questions from buyers range from - "why is he selling?" to "is his company leaking at the gills and needs cash to survive? Generally, there is a story. Its critical to understand the story, why a seller is selling, and how the current financials present.
I will just pay more rent. Value is determined by taking the rent your company is willing to pay and packaging the rent as a return on investment. Simply, if your company can afford to pay $10,000 per month or $120,000 per year and the return is 5% - your building is worth $2,400,000. Easy, yes? Now the fun begins. Where is $10,000 per month in relation to what other comparable buildings achieve in rent? It's either above, below, or at par. Par or below - you're golden. Above and you're scrambling. You see, an investor looks at the worse case scenario - you spit the hook after a year, can't pay the rent - or worse file bankruptcy - and he's stuck with a building he can't rent for the same amount you were paying.
You strap your operating company. If you own your building and times get tough, you can adjust the rent your company pays you - after all, you are the owner AND the tenant. Once you inject an arm's length investor into the mix - that flexibility evaporates. You are now bound to a lease. If you don't pay, you may get evicted.
There are tax consequences. As we've discussed, selling appreciated commercial real estate comes with a heavy tax consequence - unless you employ a tax deferred exchange. Yes, you free your equity, but at a significant cost - in some cases up to 35%.
This structure, in our parlance, is known as a sale leaseback. Different than a straight lease and not a short term lease that accommodates a purchase, a sale leaseback allows an owner occupant the chance to sell at today's high prices and remain in the building - albeit as a tenant - and avoid a move.
It's a slick arrangement when the correct motivations are involved. I wrote about those reasons in a past post. You can read about it here.
Today, I want to spend a moment and discuss the downside of a sale leaseback.
The message it sends to the market. When a sale leaseback is listed and marketed for sale, the questions from buyers range from - "why is he selling?" to "is his company leaking at the gills and needs cash to survive? Generally, there is a story. Its critical to understand the story, why a seller is selling, and how the current financials present.
I will just pay more rent. Value is determined by taking the rent your company is willing to pay and packaging the rent as a return on investment. Simply, if your company can afford to pay $10,000 per month or $120,000 per year and the return is 5% - your building is worth $2,400,000. Easy, yes? Now the fun begins. Where is $10,000 per month in relation to what other comparable buildings achieve in rent? It's either above, below, or at par. Par or below - you're golden. Above and you're scrambling. You see, an investor looks at the worse case scenario - you spit the hook after a year, can't pay the rent - or worse file bankruptcy - and he's stuck with a building he can't rent for the same amount you were paying.
You strap your operating company. If you own your building and times get tough, you can adjust the rent your company pays you - after all, you are the owner AND the tenant. Once you inject an arm's length investor into the mix - that flexibility evaporates. You are now bound to a lease. If you don't pay, you may get evicted.
There are tax consequences. As we've discussed, selling appreciated commercial real estate comes with a heavy tax consequence - unless you employ a tax deferred exchange. Yes, you free your equity, but at a significant cost - in some cases up to 35%.
Friday, September 15, 2017
Seller Accepts an Unsolicited Commercial Real Estate Offer - 5 Reasons Why
Recently, I penned a post entitled "Should I Accept an Unsolicited Offer for my Commercial Real Estate".
If you missed the post, you can quickly catch up by clicking here.
The conclusion? - a resounding no. It is my firm belief, a seller can achieve a higher price by putting the market forces of buyers competing to work.
OK. Got it? Then why would any seller accept an unsolicited offer for their commercial real estate? In my opinion, the reason is contained within the list below.
Seller is desperate. More is owed than the property is worth. A lender has called a loan against the real estate. The operating company housed in the building filed bankruptcy. All could lead a seller to be desperate. If the property is marketed, the desperation becomes public - disclosed, discussed, and baked into the offering prices. Such desperation can also carry a tight time frame which won't allow a normal marketing process to be conducted.
Seller wants to avoid disruption. An owner occupant is concerned by the business interruption a marketing process will create. After all, folks will want to tour - during normal working hours when you are making and shipping things. Tours - unless very carefully controlled - distract employees and add a layer of suspicion by those working in the building. If a seller has not told his employees he is selling the building - you don't want them to find out from someone walking by their office.
The sale is a part of a bigger sale. Frequently, the sale of your commercial real estate is coupled with a sale of the business that occupies the premises. Because two sales are involved, the commercial real estate sale may pale in importance to the business sale. In such an instance, a marketing process for the building is jettisoned in favor of the business deal.
Seller is unsophisticated. Rarely is this the case. With access to on line research and countless commercial real estate professionals at the ready, most owners of commercial real estate are quite knowledgeable about the market and property values. However, in limited circumstances - and out of convenience - a seller may react emotionally to an unsolicited offer and accept it without testing the market.
The unsolicited price offered cannot be bettered in the market. I've seen this happen recently. Precautions must be made, however. You must be crystal clear with a seller - based upon what we are seeing in the market - recent sales, current avails, investor motivation, etc. - what is before you is as good as a marketing effort will produce - and without all of the appurtenant disruption a marketing process will create.
If you missed the post, you can quickly catch up by clicking here.
The conclusion? - a resounding no. It is my firm belief, a seller can achieve a higher price by putting the market forces of buyers competing to work.
OK. Got it? Then why would any seller accept an unsolicited offer for their commercial real estate? In my opinion, the reason is contained within the list below.
Seller is desperate. More is owed than the property is worth. A lender has called a loan against the real estate. The operating company housed in the building filed bankruptcy. All could lead a seller to be desperate. If the property is marketed, the desperation becomes public - disclosed, discussed, and baked into the offering prices. Such desperation can also carry a tight time frame which won't allow a normal marketing process to be conducted.
Seller wants to avoid disruption. An owner occupant is concerned by the business interruption a marketing process will create. After all, folks will want to tour - during normal working hours when you are making and shipping things. Tours - unless very carefully controlled - distract employees and add a layer of suspicion by those working in the building. If a seller has not told his employees he is selling the building - you don't want them to find out from someone walking by their office.
The sale is a part of a bigger sale. Frequently, the sale of your commercial real estate is coupled with a sale of the business that occupies the premises. Because two sales are involved, the commercial real estate sale may pale in importance to the business sale. In such an instance, a marketing process for the building is jettisoned in favor of the business deal.
Seller is unsophisticated. Rarely is this the case. With access to on line research and countless commercial real estate professionals at the ready, most owners of commercial real estate are quite knowledgeable about the market and property values. However, in limited circumstances - and out of convenience - a seller may react emotionally to an unsolicited offer and accept it without testing the market.
The unsolicited price offered cannot be bettered in the market. I've seen this happen recently. Precautions must be made, however. You must be crystal clear with a seller - based upon what we are seeing in the market - recent sales, current avails, investor motivation, etc. - what is before you is as good as a marketing effort will produce - and without all of the appurtenant disruption a marketing process will create.
Friday, September 1, 2017
A Commercial Real Estate Deal is Really 3 Negotiations
As if one negotiation is not enough, we in the commercial real estate profession insist upon three separate negotiations for every deal. Why you may ask? Let me spend a moment and give you my take.
Negotiation One - The proposal. Once upon a time and not too long ago, a buyer's expression of interest to buy a property from a seller took the form of a binding offer - the deposit receipt and escrow instructions. Outlined were the price, escrow period, loan amounts, representations and warranties requested of the seller, and a period for due diligence and closing. The buyer signed the offer, deposited a good faith deposit with the broker and hoped his representative could convince the seller to make a deal under acceptable terms and conditions. Created, were all sorts of problems with this structure. Few buyers took the time to review the document they were signing. Misunderstandings occurred. Buyers changed their minds. Sellers decided not to sell. The impact of the sale weren't properly vetted. Buyers made commitments to move which backfired when the deals were not closed. Litigation ensued. Quite a mess. What evolved was the non binding letter of intent. Most negotiations now originate with such a letter.
Negotiation Two - The purchase and sale agreement. Because the first negotiation is via a non-binding letter, the agreed upon terms and conditions - such as the price - must be placed in a document that will commit the parties to accomplish certain things - such as opening an escrow, notarizing grant deeds, delivering clear title to the property, representing the seller is authorized to sell, etc. Ample time is given to the buyer and seller to comment on the specific language of the agreement and request changes - another negotiation. Once the binding purchase and sale agreement is signed by the buyer and seller, a period of buyer due diligence commences. During this period of time, the buyer arranges financing, checks out the physical aspects of the building - roof, fire suppression system, plumbing, electrical, heating and air conditioning, reviews the title to make sure no matters are looming, checks out the condition of the soil for potential environmental contamination, and visits with the city to insure the buyer's proposed use for the building is allowed - quite a bit to accomplish in a 30-45 day period.
Negotiation Three - The end of due diligence. Presumably, the buyer has completed all of their inspections, the lender has approved the loan, title is clean and ready to be transferred and the deal can safely move toward closing - ooops, not so fast. Invariably, something is uncovered in the due diligence period that surprises the buyer and causes another round of negotiations. These surprises can be as simple as a roof repair and as complex as an environmental clean-up. Sometimes, the issues can be fixed with a dollar credit from the seller to the buyer. However, sometimes the problems are more systemic and can result in a cancelled transaction.
Negotiation One - The proposal. Once upon a time and not too long ago, a buyer's expression of interest to buy a property from a seller took the form of a binding offer - the deposit receipt and escrow instructions. Outlined were the price, escrow period, loan amounts, representations and warranties requested of the seller, and a period for due diligence and closing. The buyer signed the offer, deposited a good faith deposit with the broker and hoped his representative could convince the seller to make a deal under acceptable terms and conditions. Created, were all sorts of problems with this structure. Few buyers took the time to review the document they were signing. Misunderstandings occurred. Buyers changed their minds. Sellers decided not to sell. The impact of the sale weren't properly vetted. Buyers made commitments to move which backfired when the deals were not closed. Litigation ensued. Quite a mess. What evolved was the non binding letter of intent. Most negotiations now originate with such a letter.
Negotiation Two - The purchase and sale agreement. Because the first negotiation is via a non-binding letter, the agreed upon terms and conditions - such as the price - must be placed in a document that will commit the parties to accomplish certain things - such as opening an escrow, notarizing grant deeds, delivering clear title to the property, representing the seller is authorized to sell, etc. Ample time is given to the buyer and seller to comment on the specific language of the agreement and request changes - another negotiation. Once the binding purchase and sale agreement is signed by the buyer and seller, a period of buyer due diligence commences. During this period of time, the buyer arranges financing, checks out the physical aspects of the building - roof, fire suppression system, plumbing, electrical, heating and air conditioning, reviews the title to make sure no matters are looming, checks out the condition of the soil for potential environmental contamination, and visits with the city to insure the buyer's proposed use for the building is allowed - quite a bit to accomplish in a 30-45 day period.
Negotiation Three - The end of due diligence. Presumably, the buyer has completed all of their inspections, the lender has approved the loan, title is clean and ready to be transferred and the deal can safely move toward closing - ooops, not so fast. Invariably, something is uncovered in the due diligence period that surprises the buyer and causes another round of negotiations. These surprises can be as simple as a roof repair and as complex as an environmental clean-up. Sometimes, the issues can be fixed with a dollar credit from the seller to the buyer. However, sometimes the problems are more systemic and can result in a cancelled transaction.
Thursday, July 27, 2017
Should You Lease or Own a Commercial Building with Allen Bu...
How do you know if you should Lease or Own a Commercial Building for your business needs?
The economy is growing, rents are rising, and commercial real estate space is more difficult to find.
So what questions should you answer to know if you should lease or own a commercial building for your business needs ?
Allen Buchanan is a principal with Lee & Associates in Orange County, CA and a true commercial real estate pro. He has specialized in industrial space sales and leasing since 1984 and provides the following tips for business owners considering purchasing a commercial building.
Questions to ask before buying commercial real estate
Market
Where is the market in the cycle? Commercial real estate is very cyclical. It is important to consider what is the current state of the market. Is space plentiful or limited? Are capital markets willing to lend with favorable terms? Is there an expected growing demand for space like you need?
Who are You?
What type of company is yours? What are the space needs for your business? Do you expect to outgrow your space in the next three years? Are you making money? A lender will look for a favorable track record including, have you been in business for at least five years?
If you are stable, have a proven track record, and anticipate the continuation of your business and have the time to benefit from long term appreciation, buying might fit be for you.
What are the Steps to Buying Commercial Real Estate?
If you have been in business for a while, you likely have received numerous calls from commercial real estate brokers. If you are thinking about buying, interview a couple of theses brokers and find out if they can potentially be a resource for the time it takes to find a property.
Find out if you are eligible for financing. The commercial real estate broker can point you to a potential lender. Typically SBA loans and brokers provide some
How long will it take? To be successful, you should plan on one to two years before you are moving into a new property. The lengthy process includes:
Search
Potential misfire
Loan underwriting
Physical inspection
Appraisal
Build out
Permitted usage question and answer with city
What are the Benefits to Ownership?
Long term, for the right situation, you can benefit significantly through:
Appreciation: rent increases and demand will push the value of the building up over time. Provided you have the time, this is a huge opportunity.
Depreciation: for the owner of the building, the purchase price or the structure can be expensed over 39.5 years.
Cost stability: when you own a building, you can more easily control the cost of space for your business needs.
For more goto:
www.allencbuchanan.com
https://www.youtube.com/user/abuchana...
ROOF Issues. Who pays?
Summer is a great time to consider an annual roof maintenance before the rainy season is upon us. Are you aware who is responsible for your roof maintenance? How about the repair of your roof? What if the roof needs replacing? If you own and occupy your commercial real estate, you are responsible for all three. But, what if you are a tenant? Knowing these things could save you thousands of dollars. I discuss this and much more on this week's edition of THURSDAY Thoughts for your commercial real estate.
ROOF Issues. THURSDAY Commercial Real Estate Thoughts
Thursday, July 13, 2017
Keep your ENTITY Viable. THURSDAY Commercial Real Estate Thoughts
Recently, I was engaged by a property owner to sell his property in Southern California.
We discovered the LLC that owned the buildings was suspended by the Franchise
Tax Board. After some weeks and thousands of dollars, we revived the LLC and
were able to close our sale. DON'T let this happen to you!
Tax Board. After some weeks and thousands of dollars, we revived the LLC and
were able to close our sale. DON'T let this happen to you!
Keep your ENTITY Viable. THURSDAY Commercial Real Estate
Thoughts
Thoughts
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