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

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

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!