Friday, April 13, 2018

Would you Own your Commercial Real Estate - If Vacant?

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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?

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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

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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

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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

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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?

Absolutely!

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.

Friday, January 26, 2018

The ENVIRONMENT in which We Deal

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One of the differences between a single family residential sale and a commercial sale is the requirement for an environmental report. Also known as a Phase I Assessment or an ESA, these beauties crept into our commercial real estate cribs in the mid 1980's.

According to our friends at Wikipedia, "...demand increased dramatically for this type of study in the 1980's following judicial decisions related to liability of property owners to effect site cleanup. Interpreting the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the U.S. courts have held that a buyer, lessor, or lender may be held responsible for remediation of hazardous substance residues, even if a prior owner caused the contamination; performance of a Phase I Environmental Site Assessment, according to the courts’ reasoning, creates a safe harbor, known as the 'Innocent Landowner Defense'."

So now, an enviro assessment is a normal part of any due diligence and folds into most loan approvals. Rarely, will we encounter a Phase I in a lease transaction - although depending upon the size of the tenant, we've seen this as a requirement as well. 

Generally, the progression of reporting is as follows:

Limited Phase I - also known as a Transaction Screen Assessment - TSA. Eliminated in this report is a site visit, a review of certain county or city records or something else. We generally see TSAs for a refinance or in the case of an office building or retail center - where the chances of contamination are unlikely. The TSA is much more limited in scope than the following assessments. 

Phase I. Most typical is the Phase I Assessment. The Phase I reviews old aerials and county and city records for any history of contamination locally or regionally - super fund sites, leaking gasoline tanks, underground storage tanks, or other recognized environmental concerns. Interviewed are the neighbors and cataloged are the current and previous uses of the site with an eye toward anything that would pose an environmental risk. Nine times out of ten, the Phase I recommends no further action and the deal can progress. However, in that other 10%, additional testing may be required. 

Phase II. When additional testing is recommended, an invasive test - Phase II is employed. Several soil samples are taken in the area of concern on the interior or exterior of a building. Analyzed are the soil samples for evidence of hazardous chemicals which may pose a health risk to occupants of the building. Also taken into consideration are the gases emanating from the soil, which if breathed could be carcinogenic. The State of California places certain "screening levels" to serve as a guideline for the amount of chemicals allowed. 

Phase III - also known as pre-remediation. Now we are into the area where significant contamination is detected from the Phase II sampling and a decision is made to dredge up the bad stuff and remove or aerate it. A Phase III outlines a plan to rid the site of the harmful soil and building materials including an estimated cost and time table as well as a plan for future testing. 

Remediation. You may have seen a shuttered gasoline station with a big pile of dirt where the pumps once resided - you guessed it, that site is being remediated. In some occasions, remediation may take years and require monitoring wells for future readings. Gas stations, chromium plating companies and dry cleaners are the biggest culprits when it comes to the trifecta of enviro testing - Phase I, II, III. 

Friday, January 19, 2018

The Building Blocks of Commercial Real Estate

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My biggest fan and harshest critic is an avid reader of this column. He also is my neighbor and a veteran of the construction industry. 

So as not to embarrass him, we will call him Sam. Sam approached me over the weekend and lamented the fact I don't write about construction topics - specifically the way commercial real estate is built. 

So in an effort to retain good circulation for the OC Register and pleasant neighborhood conversations, here goes.

Many moons ago, commercial real estate - industrial buildings - was built of steel or concrete block. 

Steel, although structurally sound with condensed engineering, permitting and construction time had a shelf life shorter than most 25-30 year loan maturities. In our coastal climate of Southern California, steel is susceptible to corrosion. Nowadays, newly constructed metal buildings are not allowed in most Orange County cities. Many, however, are still found in the Inland Empire and numerous older industrial areas in Anaheim, La Habra and Santa Ana. 

Concrete block buildings have their unique advantages and challenges. The warehouse height of most concrete block buildings is shorter than modern logistics companies require. You are limited to the height at which you can stack blocks before a giant game of Jenga ensues. Openings - windows, truck loading doors, and man doors - create obstacles for concrete block construction as well. The more openings - the strength of the construction wanes. When the Earth starts to shake, a concrete block building - if not seismically retrofit - can end up a pile of rubble. The good news - concrete block buildings don't require much staging area during the construction phase - so they can be built in a smaller configuration. We still see concrete block construction in many schools, retail buildings and government facilities. In industrial applications - not so much. 

Enter the concrete tilt up building. 100% of new industrial construction and a large percentage of existing industrial inventory is comprised of concrete tilt up construction. Why, you may ask? It's design flexibility, structural integrity, and height capability. Watching a concrete tilt up building rise is akin to an enormous card house. The foundation is poured, the footings are dug, the slab serves as the casting area for panels which are poured in a stack. Once the panels (walls) are cured, a large crane plucks them and tilts them until the roof can be set atop. It is truly a cool process to observe. 

So there you have it, Sam. The building blocks of commercial real estate. Oh by the way, I like the new paint job on your house!

Friday, January 12, 2018

Are YOU an Arbitrary Commercial Real Estate Owner?

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Arbitrary. Defined as: "based on random choice or personal whim, rather than any reason or system. Or, unrestrained and autocratic in the use of authority." Also synonymous with capricious, whimsical, random, chance, or unpredictable. 

We encounter many owners of commercial real estate these days who have arbitrary expectations. Thus, I thought it would be fun - in Jeff Foxworthian fashion - to describe some of these characteristics as "you may be an arbitrary commercial real estate owner if..."

So, here goes!

You may be an arbitrary commercial real estate owner if you price your building at twice what the recent comps would suggest it's worth. 

You may be an arbitrary commercial real estate owner if you refuse to address necessary repairs that are highlighted in a building inspection.

You may be an arbitrary commercial real estate owner if your trusted advisor is a Ouija board - do they make those anymore?

You may be an arbitrary commercial real estate owner if you are offered a lease rate 30 percent higher than the latest lease deal - and you counter at an even higher rate. 

You may be an arbitrary commercial real estate owner if you believe you can always lower your price but you can't raise it. 

You may be an arbitrary commercial real estate owner if your market view is based upon cocktail party chatter. 

You may be an arbitrary commercial real estate owner if you are certain that second story, un-permitted office space is worth the same a ground floor office space. 

You may be an arbitrary commercial real estate owner if you are convinced a digital presence is a gift from Amazon.com.

You may be an arbitrary commercial real estate owner if  you shun an offer below your asking price by saying - "he's just not seeing the value!"

OK. You get the idea. Thanks for playing along and having some fun with this. The arbitrary nature of owners these days stems from the seller's market in which we find ourselves deeply entrenched. When will the "worm turn"? Next year! Why, you may ask. I'm not certain - just being arbitrary. See there. It's works both ways.


Friday, January 5, 2018

3 Tasks to Accomplish - NOW! With Your Commercial Real Estate

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Ahhh, January 2018. New beginnings, an infant year and clear sailing ahead. Rather than focus on resolutions which many of us break before we habit writing the new date - 2018, let's spend some time discussing the three things you should accomplish NOW - in January - with your commercial real estate.

Examine the new tax law! Run, don't walk to your tax advisers office. That line you see protruding out the front door includes his clients with similar questions. Specific to your questioning should be "pass-through" entities and how your specific entity(s) is treated under the new tax plan which took effect on January 1, 2018. For certain LLCs, S-Corporations, sole proprietorships, personal service corporations, etc., there is a 20% tax deduction from the income the entity generates. Many, many commercial real estate ownership entities may be effected. Limits on the amount of qualifying income exist as well as the types of entities that apply, so plan on spending a couple of hours or so understanding the ins and outs.

Roof and Heating, Ventilating, and Air Conditioning. If you are a tenant, you may be responsible for the repair and maintenance of your roof and systems that heat and cool your building. As an owner-occupant, yes - you are responsible. The winter months are a great time to fire up that AC and see if there are any glitches. Waiting until the temps are sweltering is a bad time to realize your cooling is blowing hot air. SoCal will experience a relatively dry winter as La Nina conditions persist. Awesome, you say - no need to maintain or repair the roof with no rain in sight. Wrong! Santa Ana winds which accompany dry weather, blow all sorts of debris onto your roof. If the leaves, dirt, and other detritus are allowed to clog the down spouts  - your roof will suffer when the rains return. Hot dry winter weather also causes the mastic around skylights to crack and peal - causing - you guessed it - leaks!

Leases, extension rights, loan maturities. The month of January is an appropriate time to grab a copy of that lease or mortgage papers and take a look. At the forefront of your perusal should be any expiration of your lease or extensions that must be triggered this year. Does your loan reach maturity in 2018? If so, now is a great time to re-finance that note.

A very Happy New Year to you all!

Monday, January 1, 2018

5 Commercial Real Estate Lessons Learned in 2017

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Good bye 2017 and hello 2018! This year was particularly good to us as commercial real estate professionals. Our market continues to rock on, break value records, and enjoy the longest up-trend in decades.

Since the doldrums of 2009-10, sales prices have tripled in some cases and lease rates are not far behind.

As I reflect on the year of 2017, what lessons were learned? Indulge me while I regurgitate a few.

When you believe you've seen it all - guess again. This year we revived a suspended entity - a seller's LLC where no renewal fees had been paid or tax returns filed - for 28 years!, auctioned a property through Ten-X, convinced a buyer - on behalf of our seller -  to cancel a non-contingent deal, achieved record selling prices for several buildings. Never, in a span of four decades have I experienced any of these events. Whew!

EVERYTHING will sell - if properly priced. I will forever remember this year for the mis-fit toys that traded. You know the mis-fit toys - a Jack-in-the-Box who wants to be a dentist? Commercial real estate has its version of mis-fit toys as well. Price it properly and it will go!

Pay close attention to where we are in the cycle. Several clients renewed leases this year. Unfortunately, lease rates are close to their all-time high. Sign a ten year lease today and chances are - come renewal time - rates will be comparable to today. A three year lease may present you with a surprise - a rate lower than you currently pay.

Most don't understand what we do. I frequently speak to groups of residential agents and other trade organizations. Questions revolve around our profession - what we do, how we are compensated, are we that different from our residential counterparts. We do three things; either on the owner or occupant side - sell buildings, lease buildings, or renew leases. Most commercial brokers "eat what they kill" - we are paid commissions for closed transactions and receive no guaranteed salary. Commercial deals are business transactions vs a consumer sale in the case of a residential deal. Both are contractual agreements. Generally, residential brokers sell house whereas a commercial broker will do as many lease as sale transactions.

This up trend is unlike any we've witnessed. Historically, commercial real estate values ebb and flow in 7-10 year cycles. Typically, when housing hits the skids, we follow within a year. Our present up-tick started in the third quarter of 2009 - eight and one half years ago. Many of us believe an adjustment is overdue. But, despite our dark predictions, the market keeps rising to heights never witnessed. 2018 should be interesting indeed!