Friday, March 16, 2018

Auctioning Commercial Real Estate - UPDATE

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As a seller of commercial real estate your considerations are many but filter down to two primary concerns - selling for the highest price in the shortest period of time.

Selling for the most money results from a bevy of buyers beating a path to your property - with pockets full of pennies - willing to pay you promptly.

Closing quickly - shortest period of time - involves choosing the RIGHT buyer from the pool of potential purchasers.

OK, you say. How do I insure I check both boxes - selling for the most dollars possible and in the shortest period of time? Answer. Consider auctioning your commercial real estate!

Recently, I wrote about the auction process. If you want to read what I had to say, click here.

Drawn was the following conclusion:

"Auctioning is something to consider if you are selling a partially or fully leased commercial building. Your commercial real estate will be exposed to the broadest market. If your goal is to sell your commercial real estate to an owner occupant, auctioning is not the best avenue - currently. But, stay tuned. The process will evolve and is worthy of a look in the future."

The process has in fact evolved as Ten-X, the nation's largest commercial real estate auction company, now caters to all genre of sellers - lenders who have foreclosed, equity owners whose properties have income, and equity owners whose property will be sold vacant. Ten-X still offers their live bid platform but have expanded their program to include the managed bid and offer select, alternatives. 

Conventionally, if a seller wanted to sell, he engaged a commercial real estate broker and listed the property. The broker - through his marketing channels - publicized the offering to potential buyers and cooperating brokers, conducted tours, solicited and fielded offers, negotiated the terms, entered escrow - and assuming all was as advertised - closed. If all went well - and the property had few warts - the process generally could be accomplished in 90-150 days. 

Now, a seller can engage Ten-X and a broker to market his commercial real estate for sale. No additional cost is borne by the seller as Ten-X charges the buyer a transaction fee of 1.5%-5% depending upon the platform chosen - managed bid, offer select or live bid. 

How does a seller benefit from this arrangement? The widest possible net is cast for potential buyers - competition is created - and the highest possible price is achieved. With the Ten-X platform, certainty of close is established. Buyers are carefully vetted and hefty penalties ensue if the buyer fails to perform. So, you sell for the most money in the shortest period of time. 

Friday, March 9, 2018

How Will a Split Roll Affect California Commercial Real Estate?

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Split roll. Not a term with which you are familiar? A brief primer. Split roll refers to a different treatment of property taxes for residential vs commercial real estate.

Since the enactment of Proposition 13 in 1978, California property owners have enjoyed a program which assesses property values annually in July - commercial and residential, multiplies that assessment amount by 1% and sends a property owner a bill in October. Your percentage may vary slightly as municipalities are able to add to your property tax bill for such things as local utilities, and bond payments incurred for the costs of streets, curbs, gutters, and storm drains - also known as a mello roos assessment.

The first installment for the first half of California's fiscal year - July 1 through December 31 are due in November and late in December. The second installment for the second half of California's fiscal year - January 1 through June 30 are due in February and late in April. I remember these property tax due dates by employing the mnemonic device No Darn Fooling Around. Property taxes cannot increase by more than two percent annually unless the commercial building or residence trades hands - which triggers an assessment based upon the sale amount. If a building or house has not sold in twenty years, the resulting property tax an owner pays is substantially less than that house across the street that transacted last year. Some say this isn't fair - for there to be such a wide disparity.

Currently, there is conversation among our state legislators to "split the tax roll" and bill residential property owners differently than commercial real estate owners. If you own a house, the current prop 13 rules would remain. Own a manufacturing building - your property taxes are going to increase. The theory? Businesses can afford to pay more and many commercial property owners benefit from very low assessed values compared to current commercial real estate values.

Simply stated, here is the problem with a split roll, in this author's opinion. Commercial real estate is owned by folks who occupy the buildings with their businesses or by investors whose livelihood relies upon rents paid by tenants. Businesses - whether owner occupants or tenants -  create jobs, produce and sell goods and services at a profit, hopefully. Jobs are created and goods and services are produced at a cost - which includes the rent paid by an occupant. Therefore, if business property taxes go up, who bears that expense? Yep. The consumer of those goods and services - you and I. Alternatively, a business leaves California for the cheaper tax environs of Texas or Nevada. Neither scenario sounds terribly promising for the business atmosphere in the Golden State.

Friday, March 2, 2018

3 Random Commercial Real Estate Thoughts

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Every few months, I purge my mental inbox with a post such as this - including random thoughts from my daily commercial real estate profession. I hope you appreciate the randomness.

Cannabis - California's growth industry? California voters legalized recreational cannabis sales in November 2016 via Proposition 64. Medicinal cannabis has been legal in California since 1996. However, in Orange County, Santa Ana is the only city to enact a plan to create dispensaries for the legal sale and distribution - medicinal in 2015 and recreational this year. Included in Proposition 64 was a sunrise on the law for January 1, 2018. Basically, the state said - OK, recreational pot is now legal statewide but cities, counties, municipalities; you figure out how to regulate the sales through local zoning oversight. Hmmm. An interesting conundrum has resulted - it's legal but only a few dispensaries in Santa Ana can legally sell it. Oh by the way, cannabis is still illegal federally. So, things such as banking and small business association loans for plant and equipment acquisition - all under federal purview - are prohibited. Plus, the current administration is adopting a more aggressive stance on the enforcement of the federal law than previous administrations.

We have plenty of room - NOT. The new tax law should be great for businesses! Pass-through corporations such as LLCs and Sub S corporations will reap gains from the 20% tax deduction and streamlined write-offs for equipment. Bigger companies will benefit from the reduction in corporate tax rates from 35% to 21%. Businesses should grow - bolstered by the positive consumer confidence and robust stock market. Great, right? Unfortunately, our commercial real estate inventory cannot handle the expansion! Demand has outstripped supply for several years leaving a severe shortage of industrial space. The solution? Move out of state, figure out a way to produce more within existing physical plants, or charge more. Rents are already out of sight. What we need is good recession to stabilize our space demand - just kidding - sort of.

Almost three years. February 2018 marks three years for this columnist and my weekly contributions - hopefully they've not been weakly. I've reaped great joy meeting some of you, assisting you with your commercial real estate questions, reading your criticism, and actually representing a few of with your building requirements.

Onward for 2018!

Friday, February 23, 2018

Buyer's WILL Pay for these Commercial Real Estate Features

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Last week, in this space, I discussed the amenities contained within your commercial real estate that do not "move the meter" with buyers - AKA, buyers don't care and won't pay a premium for the benefit.

You may wonder - are there, in fact, features that will create a greater worth for the real estate?


In no particular order they are:

Extra land. Generally, a greater price will be paid if extra land exists. In our congested county, extra land is a rarity. However, I must define "extra". We use the term excess and surplus interchangeably - even though we shouldn't - to describe extra land. You see, if the extra land doesn't serve the use contained, but cannot be separated and sold, the land is actually surplus land. In this instance, an occupant who had a large outside storage need would ante up. If the surplus could house additional building square footage - voila! In the absence of these two circumstances, no increase - because fronting cash for future advantage is costly. Conversely, if the extra land was excess - I can separate it and sell it - eureka!

Warehouse ceiling height. Rents and sales prices are quoted in floor area square footage. Ignored is the cube space that exists in a warehouse. I wrote about that here.  In effect, if the warehouse ceilings are higher than what's normally found in the market - an occupant can stack their goods higher and benefit from space for which they aren't being charged.

Loading doors that allow large trucks. Large trucks cannot make deliveries to a warehouse door that is lower than the truck bed - without a lot of excess material handling. Therefore, buildings equipped with "truck high loading doors" are valuable. If the warehouse ceiling also allows high stacking - you've got a duo in higher demand than Batman and Robin!

Fenced outside staging or storage areas. A typical manufacturer can benefit from outside storage of raw materials or finished goods. Logistics companies enjoy fenced and secured parking for their trailers. If your building has either, plan on jacking up that asking price.

Heavy electrical service. Much is involved with upgrading an electrical service into an industrial building - permitting, capacity, SCE studies, cost, time delays. If you own a building that has survived the agony of adding power, congratulations! This is a feature that will sell!

Fiber optic feeds. Many of the buildings in Orange County were built before the digital age. Consequently, few of them are wired for today's mass use of on-line commerce. Akin to the description of heavy electrical service additions, adding fiber suffers the same challenges and the same appreciation if the hurdles have been crossed.

Friday, February 16, 2018

Seller Won't Close - Now What?

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Commercial real estate transactions are contractual - buyer and seller both agree to do something in return for consideration - something of value. So, what happens if the seller decides arbitrarily that he doesn't want to complete the deal? As I am not an attorney, I will not delve into the legality of such a position but rather explore the situation as a layman.

A normally motivated buyer and seller will negotiate a purchase price, enter an agreement which outlines the contingency period and closing date, deliver the signed agreement and an earnest money deposit to escrow and proceed.

Occasionally, the deal hits a snag. Generally, we see said "snags" on the buyer's side as the buyer discovers something untoward in his investigation of the property - air conditioners that don't condition, a roof that leaks, a percolating fuel tank, higher expenses than expected, an appraisal less than the agreed upon price, or some other nuisance. The good news is the buyer is protected if the "snag" is discovered during his contingency (due diligence) period. Typically, the buyer requests a price reduction from the seller or simply cancels the deal if the buyer perceives the problem is too big too fix with money. Certainly, the buyer has the option to look past the snag and proceed - but few do so. Once the buyer has satisfied himself, he waives contingencies, allows his earnest money to be non-refundable and marches toward the close of escrow. The buyer can still cancel, but simply loses his deposit.

Once a seller has agreed to sell, however, and the buyer completes his side of the deal, the seller doesn't have an escape hatch - lest he encounters a specific performance action by the buyer.

I've witnessed a couple of sellers, in my years in the trenches, who refuse to close. Most frequently, its a ploy to extract some blood from the brokers. A high stakes game of poker ensues - he who blinks first loses. One seller in particular did refuse to close and convinced the buyer to allow him to cancel the deal for a small monetary settlement - rare but it does happen. Fortunately, in that case, the buyer was an investor - a buyer relying upon the rent not a buyer planning to occupy the building for his company. Consequently, aside from some wasted time and money, the buyer wasn't harmed.

Friday, February 9, 2018

Is YOUR Commercial Real Estate Buyer FOR REAL?

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These days, multiple offers on well priced, conveniently located commercial real estate are the norm. Unlike the doldrums of a down market where the activity is tantamount to a cricket concert - activity is robust!

So, how do you filter the noise of multiple offers and settle upon the RIGHT buyer - the first go around? That dear readers, is the subject of this week's post.

Watch how the buyer acts. I've observed buyer behavior for many years. The way in which a prospective buyer behaves in a negotiation will speak volumes about the way in which he will behave once you strike a deal. Specifically, the speed with which a buyer responds to requests for information and counter proposals is a great indicator of motivation. If you monitor motivation throughout the transaction, you are less likely to be surprised by your buyer's actions.

Is the buyer on-time? If he's late to a showing - chances are the buyer is not concerned with timely performance. Not a big deal with a tour - missing a signing deadline is another story.

What is the buyer's story. If your buyer is a neighboring company whose employees park in your lot because his parking lot is filled with inventory - chances are the buyer is out of space and needs your building for growth. Conversely, a buyer moving up in size three or four fold could portend a problem with cash flow and financing. Understanding "why your building vs. another" is a solid indicator of  what's to come.

What's the buyer done in preparation. Has the buyer's broker blown your guy up with inquiries, requests to tour, and probing questions? When the buyer submitted his proposal, was it accompanied with a lender pre-qualification letter? How many times did the buyer look at your building before submitting his offer? Once again, these are things that suggest motivation and encouraging buyer behavior. If you receive an offer and the offeror has not seen the property - it happens - run away. The offer is not based upon a working knowledge of the facts.

Does the buyer need that "something" your building has. As we discussed in a previous post, there are items for which a buyer will pay a premium - excess land, good cube height in the warehouse, ample loading, modern architecture or remodeled offices, heavy electrical power. Discerning the "something" your building has and matching that to a buyer's requirement can predict a successful transaction - the buyer needs what you have and will pay to own it.

Friday, February 2, 2018

Commercial Real Estate is a SOCIAL Business - Or is it?

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My industry is in the proverbial dark ages when it comes to marketing through social media! Compared to our residential counterparts - who kill it with social media - we limp along under the illusion that "social" just isn't for folks who own or lease commercial real estate. Wow, how wrong we are!

So why are we so 80's you may ask? In no particular order, here are some of the reasons.

Age plays a part. The average age of a commercial real estate broker is 57. Crowded with gray haired men, commercial real estate sales evolved from predominantly family owned brokerages with names such as Daum, Cushman, Collins, Lee, Ashwill, Burke, and others. As the majority of business in the old days was fostered via relationships and referrals - and somewhat stuffily, BTW - the old generation of commercial real estate brokers farmed new opportunities on the golf course, the bar or the steak house. You called, mailed, or placed an ad when you had a new listing. If you used a computer in the eighties and nineties, you were the source of water cooler humor - as no leads will come out of that machine young man - you get out there and cold call! Industry bias toward technology has now traveled a couple of generations to present day practice. Many new agents are trained the same way we were in the eighties - get out there and make relationships!

We approach it wrong. Social media marketing isn't like taking an ad in the Orange County Register - although many approach it that way. The Register has a broad circulation and appeals to those in the market for goods and services. If you are shopping for commercial real estate, great! You see the ad, call the broker, make a deal, done! Consequently, when Facebook, Twitter, Linked In, YouTube, Instagram came along we pushed our same old message of "here is my listing - buy my stuff." Missed in this method is the way folks transact these days. Sure, there are still buyers who are in the market, see an ad, and buy. Most, however, search the web for informational content - such as "how-to" articles, videos, or images and are pulled toward a service provider. If you are the agent providing the "help" you are sought as the expert. Critically important is this digital footprint so you can be found on-line.

When will it change. Given the nature of our business - maybe never. Commercial real estate is largely relational and our transactions are tough to standardize. However, as one who's used social medial content quite effectively to meet new prospects and close deals, I believe the current generation will adopt strategies to use social media marketing the right way. Just remember, like face to face networking, social takes time and places an emphasis on gaining through giving.