Scariest Things

With Halloween a mere two days away and trunk or treats primed for onslaught by excited youth - I thought it fitting to recant some of the scariest things I’ve witnessed in commercial real estate transactions. This is my 39th Halloween as a real estate broker. I've witnessed PLENTY of scary things, which should qualify me as some sort of an expert. We will go with that anyway.
 
So, here goes, in no particular order:
 
The building inspection that you relied upon misses something. We sold a building a few years ago. During the due diligence period, our buyer left the country and asked my partner and me to engage a building inspector in his absence - which we did. The inspection proposal was addressed to us and the inspection commenced, a report was generated and based upon the findings (there were no issues identified), the buyer closed the sale deal upon his return. About a month after he closed escrow, we received a call from his attorney. The building inspector had overlooked the fact that the building had NO AIR CONDITIONING! Fortunately the building inspector made good and paid for the air-conditioning to be replaced.
 
Your lender suddenly changes the rules. Recently, we entered escrow on a building (I represented the buyer). We had negotiated a sixty day loan contingency with the seller (at the bank's request). As we approached our loan approval deadline, the bank decided that they wouldn't close until the buyer received BUILDING PERMITS for the buyer's tenant improvements - which meant at least a 120 day approval delay. Fortunately, the seller cooperated and granted us an extension. The deal closed (albeit several months after the original closing date).
 
The building you are buying appraises for less than the contract price.This happened with EVERY deal between 2009-2011 that I was involved in (or so it seemed!). We solved this in one of three ways; price reduction, increase in down payment, or a combination of the two. What I learned during these trying times was that setting the proper expectations was critically important. I was careful to point out to all concerned that our agreed upon price was SUBJECT TO appraisal - and if the building didn't appraise, we would have to discuss a solution.
 
You cannot possibly achieve city permitting for your use by your projected move in. We are seeing this issue a lot these days as it appears that ALL governmental agencies must grant your occupancy's approval. My best counsel is to ANTICIPATE the hurdles that your use will encounter and structure the transaction accordingly. As an example, if you know your use will require a high pile storage permit, communicate this to the owner of the building early and be prepared to discuss the steps needed to get your permit - which will make your request credible.
 
We experience September 2008 again. I will NEVER forget the day the music stopped - banks stopped lending, buyers couldn't buy and sellers couldn't sell because, overnight their buildings were worth half of the value before.
 
You discover a MAJOR un disclosed issue - structural, environmental, financial. If you discover the issue during due diligence, you generally have the ability to cancel the transaction without penalty. Once your contingencies are waived, you can generally cancel with penalty. If you discover the major issue after you become the owner or tenant, you should consult a good real estate attorney as warranty rules and recourse against an owner vary by state. 
 
You realize that you have the right building - but the wrong broker. I currently represent an owner who had a falling out with his previous broker. You, as the occupant or owner, can choose who you want to represent you - period. If you discover that you are obligated to PAY your previous broker (you signed a lease and he repped you and you want to renew) you can still choose other representation - although it might cost you a bit more.
 
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.
 

Sprouts Farmers Market’s State-of-the-Art Distribution Center in Fullerton, California

Recently, I was invited to the grand opening of the new Sprout’s distribution center. Because I wear two hats - commercial real estate broker and contributing columnist for Southern California News Group - this invitation had a special appeal to me. The transaction was a high profile one and the shiny new logistics building replaced an aging paper plant. You see, Sprouts Farmers Market, the well-known grocery store chain specializing in fresh and organic products, recently made a significant move, setting up its state-of-the-art distribution center in Fullerton, California. This move not only marks a new chapter for Sprouts but also promises to have a positive impact on the local community and the environment.
 
Before its relocation to Fullerton, Sprouts Farmers Market operated out of Colton, California in a facility leased by Lineage Logistics. But the company's new distribution center signifies a strategic shift. Sprouts is dedicated to delivering fresh produce to its customers, and this new facility strengthens that commitment. According to Joe Hurley, chief supply chain officer for the firm, the operation boasts state-of-the-art cold storage rooms cooled to an ambient temperature of 34°F and 55°F. Also, transportation-related emissions are reduced by saving an estimated 725,000 annual road miles from current delivery routes due to its proximity to stores.
 
To provide the community with an inside look at their impressive facility, Sprouts held an open house event. The event was attended by Fullerton's Mayor, Fred Jung, the leadership team of Sprouts, and many of the employees that work in the location everyday with the commitment of delivering their customers the freshest produce. Attendees had the opportunity to witness the significant capital investment that went into the building, as well as explore the ripening rooms for bananas and avocados, among other highlights. Perhaps the most heartwarming aspect of the event was the generous donation of $65,000 to Fullerton schools by the Sprouts Charitable Foundation. Commonwealth Elementary received $15,000, while Maple Elementary received a substantial $50,000 donation, with a particular focus on cafeteria composting.
 
At the helm of Sprouts Farmers Market is CEO Jack Sinclair, who took the reins in 2019. With a pleasant Scottish brogue and a pedigree including stints at Walmart and 99 Cent Stores, little did he know that his tenure would coincide with the COVID-19 pandemic, which presented unique challenges to the industry. Despite these challenges, Sinclair had a clear vision for the company. Sinclair's objectives included targeting Sprouts' customer base, described as “health enthusiasts and innovation seekers”. While the U.S. grocery industry is vast, with an estimated worth of $1.2 trillion, Sprouts has dedicated itself to focusing on a $200 billion slice of that business. To achieve this, Sinclair also aimed to enhance the supply chain, a goal that has been realized with distribution centers now in Aurora, Colorado, Orlando, Florida, and Fullerton, California. Additionally, he envisioned new stores with a smaller footprint and aims to grow the company's approximately 402 stores nationally by 10% per year, primarily in the Sun Belt region.
 
Sprouts' presence in Fullerton is not just about bricks and mortar; it's about creating opportunities and giving back to the community. The 337,000 square-foot logistics building, of which Sprouts occupies roughly 250,000 square feet, has added approximately 190 full time jobs to the community. But the impact extends beyond employment. Through the Sprouts Healthy Communities Foundation, the company is making substantial donations to local schools, supporting nutrition, education, composting, and even school gardens where students learn firsthand how produce is grown and delivered to stores.
 
Standout features of the Sprouts distribution center are myriad beginning with the presence of ripening rooms within the cold storage area. These rooms allow for the precise control of temperature and humidity, ensuring that avocados and bananas reach stores at the perfect level of ripeness. Aligned with Sprouts' commitment to environmental sustainability - the facility is designed for future solar panel implementation and LEED certification, emphasizing Sprouts' commitment to green building practices. In an effort to encourage environmental responsibility among its employees, the center provides 11 electric vehicle charging stations, with plans for future expansion. Additionally, an electric vehicle terminal truck assists with daily yard operations.
 
Sprouts Farmers Market's relocation to Fullerton, California, represents not only a strategic business move but also a commitment to its customers, employees, and the local community. With its dedication to fresh produce, environmental sustainability, and community engagement, Sprouts sets an example for businesses looking to make a positive impact on both a local and global scale. As we witness the fruits of their labor ripening in the heart of Southern California, it's clear that Sprouts Farmers Market is not just a grocery store but a genuine community partner.
 
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.

How Sky High Mortgage Rates Slow Commercial Real Estate

Welcome to our glorious SoCal fall! As days shorten, leaves crunch underfoot, and temperatures cool - our commercial real estate market faces several headwinds. Hamas’ blatant attack upon Israel, the ouster of our House speaker, and the ten year bond yields at twenty year highs headline the obstacles. The first two - Israel being attacked and patticake in the House of Representatives create uncertainty. As I’ve said here many times - in the face of uncertainty, long term decisions are postponed or scrapped entirely until things level. But mortgage rates at highs not seen since the financial meltdown of last decade creates gridlock in the housing market. As residential transactions ebb, we feel it commercially. How you may be wondering? Allow me to expand a few scenarios. 
 
Turnover generates commerce. My mind is drawn to the pre-pandemic spate of deals in our small enclave of houses in East Orange. On our street, my wife and I have owned our address second longest. Kitty corner to us are original owners since 1984. Their multi-generational set up remains today - only with a new gen. But lately, several of our neighbors tapped out for assisted living or passed away - leading to four homes changing hands. Also, one rental converted into an ownership. In every instance a dramatic interior redo occurred followed by a freshening of the outside as well. So let’s break this down. First, a transaction happened. In the process, real estate agents were deployed for the buyer and seller. Staging, signage, glossy brochures, and touch up repairs preceded the sale. Maybe a lawyer or two got a look at the contract. Then escrow officers, title representatives, and lenders were engaged. Home inspectors, termite companies, and moving vans were hired. Insurance for the new digs was a closing component. And let’s not forget the bump in property taxes which funds our county government. Once the deed records and title transfers - an army of contractors descends upon the early 1980’s structure. Paint, flooring, kitchen upgrades, bathroom remodeling, wall removal, additional square footage built, etc. occur in earnest. The old furniture surely can’t be set inside this pristine interior. So a trip to Living Spaces, Daniels, or Mathis Brothers follows. Now an elderly couple - with limited consumption - is replaced by a family of four or five. Groceries, gasoline, dry cleaning, sports equipment, school clothes, orthodontics, urgent care, pets and pet supplies, and Amazon home deliveries are all fueled by the new residents. Commercial real estate activity is bolstered by the sale of houses! Please take a moment to review the steps above. In every case - office, industrial and retail are enhanced. Officed are residential real estate agents, escrow and title plants, lawyers, physicians, and insurance brokers. Moving and storage, all facets of contacting and landscape companies ply their trades in industrial buildings. Finally, buying stuff. Yes! Retail storefronts or online portals. Absent the turnover in houses, these businesses are forced to downsize, close their doors, or look elsewhere for new work. 
 
Rate shock. The ten year treasuries eclipsed 4.8% last week for the first time since 2007! Great news for savers but lousy for those looking to buy a house, refinance a mortgage, expand a business, or purchase commercial real estate. Two years ago today, that same yield was 1.61%. Yes. Yields today are roughly three times where they were two years ago. Savers in 2021 - in order to get a reasonable return on their investments were forced to seek riskier assets such as stocks, commodities or real estate. Now, backed by the full faith and credit of the United States government, passive investors can make a nice risk free return on their money. Avoided are the gyrations of the stock market or the downside of real estate ownership - losing a tenant. However, this astronomic rise in rates makes borrowing more expensive. Therefore, affordability in house purchases becomes less so. If you’re among the unfortunate few who have maturing loan balances to refinance - brace yourselves. Finally, expanding a business becomes richer. Here’s what I mean. Banks price loans based upon their cost of funds and the strength of the collateral. As we just discussed, a saver can make 4.8% in treasuries so banks must raise certificate of deposit rates to attract new money into their bank. Expanding an enterprise into an uncertain economy could be viewed by some lenders as risky. Therefore, to hedge against default, the rates charged must compensate. And the circle continues. For those hoping to secure ownership in a location to house their operation - many will encounter a debt service too expensive compared to a rental. More will find leasing to be more affordable. 
 
This year, I’ve been quite bullish on our economy and the resilience of the consumer. When others predicted a slowdown, I took the contrarian position. Now, with student debt repayment ramping up after pandemic hibernation, home savings balances declining, the government money spigot ending, high interest rates ramping plus some new global unrest - I’m afraid a recession is inevitable. When, how deep and how long remain questionable. 
 
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.
 

Random Thoughts

Occasionally it’s good to empty your inbox of meandering messages. Today, I purge my consciousness of random thoughts that take up too much bandwidth. So here goes. As someone famous once opined - they’re just opinions - but they’re all mine. 
 
Generational wealth. Lately I’ve encountered several instances of generational wealth created through commercial real estate ownership. A common thread runs throughout these families, and that is investment in commercial real estate decades ago when it was much cheaper than today. Generally, there was a workhorse such as a manufacturing company that created excess dollars that was poured into commercial real estate ownership. In some cases, this was raw land held for development in the future. But, it’s astounding how deep generational wealth runs.
 
The start of school. Every September, when the school buses crank up and young people leave for college, my thoughts drift toward the trades, and how important they are to our economy. In my generation, we were taught a college education was the ticket. Nowadays, carpenters, electricians, plumbers, and handyman who can repair air conditioners start at much higher salary levels than those with college educations. Pair the two - college and a skill - and you’re golden! Additionally, these trades provide a platform for young folks to start their own businesses. Please understand I’m not dissuading anyone from getting college educations - just that there are many other ways to make a great living in today’s economy.
 
A shopping experience like no other. Recently, I decided to replace my iPad. You see since the days of the pandemic lockdown my entire workload has been carried by two Apple devices - my iPad in my iPhone. That’s right! No PC in this man’s world. I recall the last time I purchased an iPad. It was a bit painful, as passwords had to be recollected, data had to be transferred, and inevitably it just didn’t work like the old machine. To combat this, I kept my old one around for a while. Now my work space looks a bit like a scene from Wall-E, where pieces of old devices are strewn about. However this shopping experience was different - as I simply placed my old iPad next to the new one and voila - data was transferred. The new machine was operational and looked identical to the old one. What an incredible shopping experience. On my way back to meet my wife, I encountered Warby Parker. For those unfamiliar with Warby Parker, it’s a bit like a chipotle only for eye glasses. You simply walk in with your prescription, check out the samples of your glasses, and they magically appear at your house six business days later. It’s difficult for me to imagine how old line optometrists and computer stores will have a future.
 
The details matter. Recently, I negotiated a lease on behalf of our client. This is commonplace, however, this lease negotiation took on a whole life of its own. In addition to making sure the lease reflected the business points, we were asked to opine on certain areas of the lease and their impact on future events. As I reminded our client many times, we are not attorneys and do not dispense legal advice. But, our client felt comfortable with our laymen’s interpretation of certain clauses in the lease. In situations like this, I feel particularly valuable, but at the same time vulnerable. I can’t recall being so invested. The deal is now done and our client has a shiny new home. Best of luck!
 
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.
 

A Proper Opinion of Value

Often in our commercial real estate practice we’re asked for our opinion of the value of a commercial asset. These can be as loose as a “back of an envelope” guess to a full blown appraisal conducted by an MAI appraiser. If you’re unfamiliar, the MAI designation is for a certified appraiser and member of the Appraisal Institute who has met strict testing, standards and experience requirements. Minimum requirements include: Meeting the standards and ethics requirements, Completing an approved 4 year degree, Passing all Appraisal Institute required exams including a comprehensive examination, completing 4,500 hours of specialized work, completing a demonstration appraisal report, and finally submitting an application for review and approval. Generally, an MAI appraisal is required if financing is being originated or if one of the title holders has died - necessitating a “time of death” appraisal. The commercial real estate brokerage profession works arm-in- arm with appraisers. You see, we track key data which is included in an appraiser’s work - such as lease comps. Generally, in return for our cooperation, an appraiser will share her data with us. Sometimes we’ll even get specifics on the appraisal task - address, nature of the value assignment and results. But today, I’ll focus on the appraisal’s little sister - the Broker Opinion of Value and what elements it contains. by the way, these are excepts from a live opinion. The names were changed to protect the innocent. 
 
Scope of the Assignment: Something like this…We were engaged by a local property owner to provide a broker opinion of value. The real estate was purchased in 1997 for the purpose of housing their operating company. Now sought is an opinion of the value of the real estate for internal purposes. 
 
Property Description:
General:
444 Boardwalk offers approximately 100,000 square feet of warehouse space suitable for manufacturing and distribution purposes. It features both ground-level and dock-high loading doors, providing flexibility for various types of operations. 24 foot minimum warehouse ceiling clearance is advantageous for storing and handling large inventory or equipment. With 1200 amps of power, the property can support a variety of industrial manufacturing uses. .33 over 3000 sf feet sprinkler system limits the stacking height of some commodities. Ample parking spaces - approximately 200 - for employees and visitors are provided. A fenced yard adds security, staging and storage options. A strategic location offers excellent access to Los Angeles and Orange counties. 
Specific amenities:
Outlined in this section will be the specific features - square footage, % of office, etc. 
 
Methodology: Here a description of the way in which you determined value is described. It could read like this - Our understanding of the Orange County California sub-market dates back to 1984 when we began our career at Lee & Associates. Our company, and specifically our team, has been very active in the industrial arena - leasing and selling buildings of all sizes to a variety of investors and owner occupants. We consider ourselves to be market experts in this asset class of commercial real estate. To properly estimate the value of 444 Boardwalk, we analyzed four specific segments of the market - comparable sales, comparable leases, available sales, and available leases. A comparison was drawn to buildings that closely approximate the amenities contained in 444 Boardwalk. We only included deals that afforded specific transaction points. Additionally, we considered the types of buyers that would be in the market to purchase 444 Boardwalk if it was available and potential tenants that would consider leasing 444 Boardwalk if it was available for lease. Finally, we examined general economic trends and their impact on industrial vaues. 
 
Review of COMPS and Availabilities: Ideal is an analysis of three-five of each. Many more and confusion is created. Four comparable sales and five sale availabilities were considered. Analyzed were four comparable lease transactions and three lease availabilities. Specific details on each are contained in the succeeding sections. 
 
Comparable sales. We surveyed 75,000-125,000 square feet in six cities. In order to get a proper number - four - we included sales dating back to July 2022 - because only one sale has occurred this year in the range and cities surveyed. Of the four considered, square footages ranged from a low of 76,232 to a high of 123,650. Pricing ranged from $295-$316 per square foot. However, the $316 COMP occurred  before the increased interest rates took effect and slowed sale volume. Two of the buildings were purchased by occupants and two by investors. 
 
Sale availabilities. A similar narrative to the one for comparable sales is detailed here. 
 
Comparable leases. A similar narrative to the one for comparable sales is detailed here. 
 
Lease availabilities. A similar narrative to the one for comparable sales is detailed here. 
 
Potential tenants or purchasers: 444 Boardwalk would appeal to a variety of logistics providers or light manufacturing companies. Logistics providers require dock high loading, adequate sprinkler calculation for high pile storage, and proper turn radius for 53 foot trailers. 444 Boardwalk lacks the cube and sprinkler calculation for most modern logistics providers. A light manufacturing operation would require heavy power, office space sufficient to support different department operations, and a fenced and secured yard area for storage of raw materials and staging. 444 Boardwalk contains all of these amenities. Therefore, 444 Boardwalk would have great appeal for a buyer looking to occupy the building with his manufacturing business or a tenant needing a location. Many private investors are in the market and looking for good quality industrial investments. Most are driven by a return on their invested capital. Returns are in the 5.5 to 6.5% range for all cash purchasers. If a private investor must acquire the property using financing, the capitalization rate would have to be greater than his cost of financing - 7.5-8%. Sale activity throughout Southern California has waned since the halcyon days of 2021 and 2022 when institutional buyers were active. Declining sales have led to fewer exchange motivated investors in the market. 
 
Market conditions: Discussed here would be the total square footage of the market and corresponding vacancy plus the footage of the specific size range - in this case 75,000-125,000 square feet. If this distinction isn’t drawn - an improper look at vacancy emerges. Well also sprinkle in some economic head or tail winds - interest rates, global factors such as war or pandemics, elections, and recession fears. 
 
Special circumstances: These vary. In our example - here were the considerations. Ownership of the real estate and the operating company - have owned and operated from this location since 1997. We have seen a tremendous upward elevation of rental rates and sales prices since that period of time. Ownership of the real estate has subsidized the rent the operating company pays for several years. Consequently, the rental rate paid is substantially below that of the market. Such a subsidy causes an inflated estimate of the EBIDA and an understatement of the value of a capitalized market rent. 
 
Conclusion and Estimate of Value: We believe the buyer who will value 444 Boardwalk the highest is an owner occupant followed by a private investor. We don’t believe the building would garner any interest from a developer seeking to demolish the building and seek a higher and better use. 
 
               •             Occupant purchase - insert estimate
               •             Occupant lease - insert estimate
               •             Investor purchase - insert estimate
 
Finally, we include a disclaiming paragraph so that our opinion is not mis-used. You could word it this way. 
 
Disclaimer: This broker opinion of value is based upon sources from which we deem reliable. This is not an appraisal. Portions of this opinion could be used to form an appraisal. 
 
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 I’m Giving These Days

Much of my time is spent counseling family owned and operated manufacturing and logistics providers. My role is one of a trusted advisor. Ironic in this approach - is I’m not paid like other advisors - CPAs and attorneys. Their services are billed by the hour. Commercial real estate professionals are paid to transact. No deal, no paycheck. Many have asked why I have approached the business this way for nearly four decades. To me it’s simple. If I focus on the payday rather than the advice - I become a commodity. If a premium is placed upon my counsel a relationship is formed. I become less transactional and more oriented toward the long term. Fortunately, some companies I encounter need to immediately lease or buy a location or find an occupant for a vacant one. But many times I’ll spend years grooming before my brokerage services are employed. So what advice am I giving these days. Please indulge me as I share a few examples.
 
Carefully watch the market - pricing finding support and resistance. As discussed previously, since the halcyon days of 2021 and early 2022 where space was being gobbled like a pizza on grad night - the leasing and selling pace has slowed. There’s no better example than what’s occurring in Class A industrial offerings. In 2021, any new construction brought to market was pre-leased prior to completion. Once the walls were tilted, the activity commenced. Once the roof was on, the lease was signed. Now we have several concrete boxes awaiting a resident. Many more will follow this year. Interesting is the activity in “less than class A inventory”. Aging buildings suffering from substandard warehouse fire protection, compromised loading, or ceiling heights which don’t allow for maximum stacking are finding favor because they’re 25% cheaper than their Class A cousins. Advice: The fish are there - you just have to go a little deeper. Read. Lower asking rates.
 
How to deal with MASSIVE rent increases. Tenants are choking on the massive rent increases landlords are proposing and which have occurred over the past three years. This may sound contrary to the previous paragraph. You may be thinking “hmmm. I thought he said rents are coming down”. Both are true. Here’s how. Let’s say you leased a 100,000 square foot facility in 2018. The prevailing rates during that time were around $1.00-$1.25 per square foot. For easy math, that’s $100,000 per month in rent. Most leases have annual rent escalators built in. In 2018 we were writing deals with 2.5%-3% annual bumps. So. That $100,000 you paid initially, became $112,550 or $1.12 per square foot for the fifth year of your lease. The last flurry of deals happened at over $2.00 per square foot or $200,000 per month - a whopping 77% increase! If you’re facing renewal time - you encounter those crazy new rates. But now inventory is sitting. No one is dealing at those $2.00 rates. They’re compromising by leasing a location with fewer amenities - because they can. In 2021 they weren’t available. Now they are. Advice: So don’t jump at that first offer your owner makes. Understand things will further soften until all this new stock is filled.
 
If you sell the engine, you’re left with the vehicle. For those operators we counsel who made a decision to own - vs rent - the location from which their company operates - a different challenge emerges. We see countless examples of the real estate value eclipsing the worth of the enterprise. The most extreme case we’ve witnessed was ten fold. Yes. The address that houses the operation is worth ten times more than the business. Wow! Orbiting in conjunction we find the operation has its rent subsidized. A real conundrum exists here. Part of the benefit of owning the building from which your business operates is you can charge any rental rate you want - within reason. The lease payments are deducted by the business as an ordinary business expense and the owner of the building receives monthly payments. These lease payments are a ding on profit. If the rents are subsidized - not at full market value - an unreal picture of the business’s profitability is painted. Should these rents be “marked to market”, the value of the enterprise declines because the multiple of the EBIDA returns a smaller amount. By the same token, if the business is not paying full market rental value, then the value of the real estate is understated. So what’s a mother to do? Advice: Ratchet up that rent.! If the company can’t afford it, maybe it’s time to seek cheaper quarters.
 
Excess space is challenging today. If you find yourself with space you don’t need, you have four alternatives to rid yourself of the excess. You can approach the owner of your building and ask him to let you out of your lease, you could propose a buyout of the remaining obligation of your lease, you could find a sub tenant who will take over your lease, or - and we never recommend this alternative - you could simply stop paying rent and cause your lease to go into default. Because many of the leases written over the past two years are over market today - alternative one is a non-starter. Most find the amount needed to buy out their remaining obligation is too hefty. Unless you’re an unfair dealer, four is out. So subleasing is left. Advice: Your goal should be to minimize the amount of time you continue to pay rent. In other words, find a replacement as soon as you can. Understand you are limited in what you can offer to the market in the way of tenant improvements and a term exceeding that of your of your lease. The best way to make a sublease space attractive to a perspective occupant is to trim the rate by 25 to 30% and hit the market with shock and awe.
 
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.
 

Key Things To Do In 2023

Last week I shared my forecast for the balance of 2023. Discussed were my view on where interest rates might be headed and their impact upon our industrial market, class A industrial absorption, the possibility of a recession, and finally politics. My mom always suggested I not discuss politics or religion in an open forum - but alas, politics touches so many areas of our profession - sometimes venturing in is necessary. Today, however, no politics, but a review of a few things you - as an owner or an occupant of commercial real estate - should consider as the days shorten and the “ber” months unfold. 

Property taxes. One of the first lessons I learned when I became a real estate practitioner is how property taxes work in California. By the way, each state is different. Proposition 13 in 1978 set the course for how California currently handles levies on real property. Simply, 1% of the assessed value is computed to form the amount each parcel owner will pay in the fiscal year. Fiscal years run from July 1 to June 30 - therefore stemming parts of two calendar annuals. Assessments generally arrive to parcel holders in mid summer. Unless the parcel traded hands or improvements - requiring building permits - were made, the math is simple. Law requires a 2% increase. A sale will reset the assessment to the amount of the transaction and improvements increase the assessed amount dollar for dollar. Then. The first half taxes July 1-December 31 - are due November 1 and are late December 10. Second half - January 1-June 30 - are due February 1 and are late April 10. The nemonic device No Darn Fooling Around has been employed by real estate professionals for decades as a date reminder. 

Your landlord - if you lease - will do one of several things with the tax bill on your rented premises. If you operate under a triple net lease arrangement - she’ll send you the bill when it’s received and expect you to pay it. Or, she’ll pay it and expect reimbursement. Or, she’ll collect an estimate of the annual amount on a monthly basis and pay when received. Under a gross lease, she’ll pay the bill and expect reimbursement for the increased amount over the first year of your lease. Don’t know the base amount? Simply visit the Orange County tax assessors web site. You can easily research past years. 

Understanding the mechanism of property tax computation can potentially save you dollars. So keep this column as a guide. By the way, you should be able to question - and require proof - of any property tax increase. 

The fall is a great time to check on insurance coverages, building system repairs, and upcoming key dates. As you’ve read, insurance carriers are bolting our state. Those that remain behind - with a lack of competition - are jacking up rates. This can affect coverage on your premises as well as your operation’s liability. Do yourself a solid and schedule a visit with your insurance provider. You’ll be happy you did. With the dog days of summer behind us and shorter, wetter days ahead, now’s a good time to have your roof inspected and any repairs performed. Also, if your location is equipped with a well for truck high loading - check the sump pump lest you have a water feature after the first major rainfall. Finally, take a look at the key dates of your lease - expiration, options, rights to terminate or refusal to purchase, or any upcoming rent increases. 

You’re now equipped to complete the year and head into 2024!

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.