Friday, April 13, 2018

Would you Own your Commercial Real Estate - If Vacant?

Image Attribution:www.thebalance.com
Frequently, if you operate a small business, owning your location can make a great deal of sense. 

Generally, it works like this - you form a Limited Liability Company personally. The LLC then buys the commercial real estate. Your business signs a lease with the LLC. Therefore, you pay rent to yourself. Brilliant! 

Ownership allows you to fix your location costs - the purchase is financed with fixed rate debt for a period of time. The occupant is under your control - after all it is your company. Personally benefited are you from the location's appreciation - if any. Finally, there are some potential tax benefits individually. Awesome!

Now, let's add a dimension which many small business owners are facing these days - someone approaches you and offers to buy your business. 

When you consider selling the business that occupies your real estate - even if the purchaser of your business signs a lease with your LLC - the question you should ask is: would I want to own this location if it were vacant? Business changes, motivation varies, locations depreciate. At the end of your tenant's lease you may be faced with a costly vacancy. 

Remember, when you are 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. The cost of originating a new lease is staggering - in some cases 20-25% of your lease income. Are you prepared for that potential risk? If the answer is no, then there are steps 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. 

Secondly, determine how marketable the vacant building is. A commercial real estate professional familiar with the current market can provide this for you. How many vacant buildings similar to yours exist? What is the current appetite - including market time - for such a location? What is the current vacancy rate for facilities such as yours? - like yours specifically - not a market wide vacancy of all locations. How special purpose is your space? 

Third, determine what the lease income is worth to an arm's length investor. This amount less any debt owed against the location and less any closing costs of sale and net of any taxes determines the proceeds that can be deployed into an alternate non-real estate investment. If you choose to invest in another income property, the gain may be tax deferred if the new 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 - akin to selling stock in a single company and buying a mutual fund of many companies.

Friday, April 6, 2018

A SHORT Term Commercial Real Estate Need - Now What?

Image Attribution: www.todaymovers.net
One of your largest customers has requested you stock some of their products. Problem is, the customer cannot commit to you for a long duration.

Or, your wife has given an ultimatum - the business you run from the guest bedroom must be relocated to a permanent location - one without Mickey Mouse murals. But, you don't know how big the business will grow and your are reluctant to lock-in a term lease for a location.

Or, you have made the decision to discontinue your warehouse operation and run it through another channel.

Or, you notch a huge manufacturing contract which will require you to free up building space to employ another machine - but the contract expires the end of the year.

All of the above situations translate into a short term need for space. You, the business owner must take that short term need for space and marry the need with an available building. I've written ad nauseam about the shortage of space - we are now at historic vacancy lows with estimates in the 1% vacancy range. So when you trot out your short term requirement - less than one year - you are met with a reluctance to consider the proposal by owners. In this robust environment - with lease rates near the top - owners are interested in securing long term tenants - three years plus. So, what's a mother to do?

Please consider these options:

A third party logistics provider. Also known as a 3PL, these operators specialize in short term logistics and warehouse needs. Generally, their services are billed by the pallet and include handling in and out, storage, inventory, bonding, and can be cancelled or changed when your logistics needs change. 3PLs have become increasingly popular with the advent of e-commerce. So, if that customer demands you stock some of his products locally or your find yourself in need of additional space in your building - consider outsourcing to a 3PL.

An executive suite. Executive suites are a popular way to move a home based business from a bedroom to a boardroom. Akin to many small fish swimming together to appear larger, executive suite operators lease large blocks of space in high rise or mid rise office buildings and then sublease smaller portions on a short term basis. An arriving client sees a full floor of space - even though you only occupy one room. Included in your rent typically is a charge for reception, conference, kitchen, and in some cases phone and internet. Leases can be crafted as short or long term and generally you can expand or contract as needed.

A co-working space. Similar to an executive suite but vastly different, co-working space became popular in densely populated areas where independent workers could arrive, plug-in, and work along side other professionals without the need to commit long term. Generally, a monthly fee is assessed which allows you access to any of the co-working spaces available in the network. We-work has taken this concept globally. For a flat rate each month, you can reserve conference rooms or offices anywhere We-work has a location. We recently met a client from New York in a We-work space in downtown Los Angeles. A bit more professional than meeting in a coffee shop or a hotel suite, a co-working space can solve a short term need in a seamless manner.

Short term need? Don't despair. You have alternatives.

Friday, March 30, 2018

The VALUE of a Great Network - 4 Examples

Image Attribution: www.karinahogan.com.au
Recently - in this space - I opined as to the reasons to hire a commercial real estate broker to guide your building search or your disposition of a parcel of commercial real estate. Number one on the list was the value of a commercial real estate broker's network.

Today, I want to discuss this reason a bit more in depth - the VALUE of a great commercial real estate network.

We all understand how contacts in the field of construction, architecture, title, escrow, and lending are important to the success of a transaction - they all play an integral role - and in some cases a deal can't happen without their function. However, the true value of a great network reveals itself when there is a problem that must be solved in order to advance a sale.

Indulge me while I recant a few recent examples.

Fire sprinkler consultant. The height with which goods are stacked in a warehouse is governed by fire codes - the more flammable the commodity, the shorter the stack - unless an upgraded sprinkler system is employed. As a potential occupant of an industrial warehouse, it's incumbent upon you to make sure you can store your goods at an acceptable height. After all, you pay for the floor area of a building - not the cube space. Floor area efficiency by racking to the rafters. Therefore, a stacking analysis is the role a fire sprinkler consultant.

A land use attorney. Last year we sold a building adjacent to a sister building. Both were owned and occupied by the same owner occupant. Desired was to sell one of the sisters but continue to occupy both. Problem was, the owner had installed solar panels - that powered one of the buildings - on both parcels. Consequently, we required an easement be drawn outlining the area in question. Enter our land use attorney who was familiar with the process and drafted the easement.

A specialty building. Occasionally, I am asked to market a specialty building - a restaurant, a church, a school - or to assist such an operation find a suitable location. My network includes several individuals whose focus is the specialty building - a church, restaurant, or school. One of my contacts in Los Angeles only sells restaurant properties and assists restaurants in their search for space. A very easy hand off occurs when I can face a client - and with certainty - tout my contact's expertise.

A project manager. Moving a complex manufacturing operation is a task. Frequently, the occupant is best served hiring a project manager to execute the move. Generally, project managers offer their services akin to a menu - you can choose one of more services ranging from the planning and implementation of the move to installing your computers to assisting with permitting your tenant improvements.





Friday, March 23, 2018

The Intersection of Retail and Industrial Commercial Real Estate

Image Attribution: www.primelocation.com
As frequenters of this column will attest, commercial real estate comes in many forms - most commonly office, industrial, and retail.

Office space  is primarily occupied by firms that provide a service - doctors, lawyers, CPA's, real estate agents, wealth advisers, insurance brokers.

Industrial buildings are tenanted by companies that make and ship things.

Finally, retail is housed in locations where folks go to consume products or be entertained - stores, restaurants, movie theaters, and malls.

Unions between genres of commercial real estate aren't without precedent. The computer boom in the early to mid 1980s morphed industrial and office space into a new sub category known as flex or research and development space.

Much has been written lately about a new intersection - that of industrial and retail - and the benefits and challenges such a marriage has engendered. Because today's consumer buys differently than those of us born when Eisenhower was President, traditional retail has been forced to change - or be docketed into the bankruptcy courts. Once upon a time, you visited a retailer or several and your ability to buy was based upon the stock on hand on the sales floor or in the small storeroom in back. Today's retail outlets are tantamount to a showroom where products are displayed but not necessarily purchased. Now, commonly, once you've seen the item, you search for the product online - sometimes in the showroom - find it, place the order, pay with PayPal, and a package arrives on your doorstep within days - or hours. What's not seen from your LCD screen is the procurement process of warehousing, sourcing, order picking, shipping, and delivery - historically an industrial function. Mammoth warehouses have sprung up in the Inland areas of Southern California - where the "back-end" of your purchase occurs. No longer is your purchase dependent upon the stock on hand - its always available!

So will we see large "big box" retailers converted into industrial procurement centers? Or, will industrial occupants find a way to open in shuttered mall space? We've certainly seen some recent examples with the likes of Living Spaces Furniture, IKEA, Bass Pro Shops and others. A Costco is simply a warehouse where products are sold. Challenges abound, however - with zoning, configuration, amenities, and locations. Cities, dependent upon the sales tax revenues retailers generate, will weigh in as well.

Stay tuned. We will see where the intersection takes us!


Friday, March 16, 2018

Auctioning Commercial Real Estate - UPDATE

Image Attribution: www.southlandcommercial.com
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?

Image Attribution: www.octax.org
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!