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Best Way To Sell Commercial Properties

Right now is a great time to sell commercial real estate in general, but especially in Southern California where my primary market is.  Why?  Sale prices are at all-time highs, there is very limited supply inventory (so not much on the market for sale), and all kinds of buyers are looking to buy what little amount there is available for sale –driving up prices with multiple bids usually.

So, why should a seller hire a broker and pay him a commission when a seller can do it on their own?

  • Simply put, the seller will not be able to get the maximum price that a good broker can.   Many brokers have clients waiting in the wings to buy a property and these clients will pay top dollar if they are allowed to make the offer first.  Also, the price a broker is able to sell a property for more than pays for their commission.
  • Sellers don’t have the same marketing ability as a broker.  The world has become international and your reach has to be international.  The dollars are flowing into the US from other countries right now and international buyers are willing to pay more many times.  Brokers also know what is needed in terms of a marketing package to interest buyers. It’s complicated, expensive, and time consuming to put this package together properly.
  • The timing of when to put the property up for sale is critical.  When is the market peaking?  Is there a lot of competition on the market for sale now?  Good brokers will usually know what is for sale on the market as well as off market, but sellers won’t.
  • The repairs that you need to make to the property before you put it on the market are also important.  Some are worth making and some aren’t.  A good broker usually knows what to recommend.
  • What should the asking price of the property for sale be?  What if there are no comparable prices for the sales price because the sales price is higher and the property won’t appraise for the sales price?

There are many other factors in selling a commercial real estate property; but, in my opinion, it starts first and foremost with the right broker.  Doing it on your own is always a mistake.  If you don’t hire the right broker or if you do it yourself, it will cost you.  I have seen it many times.

 

 

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Best Way to Find Commercial Properties to Buy in Southern California

Right now is a great time to sell commercial real estate in general, but it’s an especially great time for it in Southern California where my primary market is. Why? Sale prices are at all-time highs. This translates to a very limited supply of inventory –there is not much on the market for sale. All kinds of buyers are looking to buy what little amount of inventory there is available for sale and, as a result, they are usually driving up prices with multiple bids.

So how do you, the buyer, find anything to buy?

1. Don’t try and search on your own for a property to buy. You simply won’t be able to find all of the properties out there and especially the ones not listed for sale. Hire a commercial sales broker that is experienced and knowledgeable in the market you want to buy in. Don’t use a broker that also does residential sales or doesn’t specialize in the specific type of commercial building you are trying to buy (for instance, don’t use an apartment, office or industrial broker to buy a retail property). The sales commissions are paid by the seller, so you don’t get a discount by not using a broker. Therefore, it’s a no brainer to use a broker.

2. Some of the best deals on commercial properties are for those properties that aren’t yet on the market listed, but are still for sale. How do you find these as a buyer? The broker you pick has to do this for you. So, make sure you pick a good one that knows how to find the properties like these that aren’t currently listed but are either still for sale or properties that an owner would be willing to sell.

3. You have to get prequalified and make sure that you are set to go when you find the right property. This will also help you in your search to know exactly what you can and can’t afford and/or what you need to target your buying search for.

4. Your broker has to set up search parameters and alerts for the online sites like Loopnet and CoStar so that, if and when a property is listed for sale that meets your criteria, you know about it the same day it happens. I can’t tell you how many times my buyers have simply been able to complete a purchase because I was able to show them the property immediately when it became available and we got to it first and were prequalified already as per #3 above.

There are many other factors in finding a commercial real estate property to buy, but it starts first and foremost with the right broker. And doing it on your own is always a mistake. If you don’t hire the right broker or do it yourself, it will cost you. I have seen it many times.

Feel free to contact me for help on these matters at 805-217-0791 or david@djmcre.com

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Commercial Leasing: Hidden Tenant Costs That Tenants Shouldn’t Pay

When leasing commercial real estate space of any type, there are many ways for landlords to hide extra costs from tenants that tenants are usually not aware of.

Two of the most common ways to hide such costs are related to the tenant’s share of operating expenses (or NNN or CAM) and measuring the building.  Retail tenants in particular have to be extra careful here as they have high exposure related to NNN expenses because they pay a direct share of NNN expenses and not just increases over a base year such as is common in office and many industrial leases.

If tenants aren’t careful to use a broker that understands the operating expense share, this cost to the tenant can be quite large during the lease term.  Many times this costs starts out low and then later on in the lease gets quite high.  It is best, in my opinion, to negotiate an overall annual cap and also have a list of expense exclusions that aren’t reasonable for a landlord to include as part of the tenant’s share.

An example of unreasonable tenant expenses would be for earthquake insurance.  Earthquake insurance usually has a deductible of 20% of the entire property value and is an expensive type of insurance to begin with.  It would be a shock for a tenant to receive a bill for their share of a deductible that reaches into the millions, but this is exactly what happens in the real world after an earthquake hits.  There are many more expenses like this that should not reasonably be part of the tenant’s share.  Some more common examples include: Common area ADA upgrades, capital expense replacements and renovations, insurance deductibles in excess of $20,000 for any particular policy, including new  expenses in future years that weren’t part of the original base year (for office leases) , and adding costs that aren’t really necessary like artwork, etc.

Measuring the building is another area where landlords can pad the numbers that will result in a higher rent to the tenant without a tenant even knowing it’s happening and  this happens most commonly in office buildings.

Landlords can and usually do include the tenant’s share of the common areas as part of the tenant’s rent.  This is called a common area load factor and increases the actual or usable square footage of the premises (and therefore the rent) leased by anywhere from 5-20% and sometimes more.  Some of the common areas are legit and some aren’t.

I recently found one industrial landlord adding 5% to their usable square footage numbers just because they had an exterior overhang on the building even though it was not enclosed space.  Another office landlord blended two methods of measuring a building and used the average overall load of the building for the first and second floors but the actual load of the building for the third floor because the load numbers were higher this way.  When I discovered each landlord doing these things they both reduced their numbers so my client was able to save rent in the percentage that the load was reduced.  This makes sense because a tenant pays rent on the usable square footage plus the common area load (called “rentable square feet).  So, if the load gets reduced –so does a tenant’s rent.

Do any of you have stories like this to tell of landlords padding their numbers?  Unsure of whether or not something you’ve experienced falls into this territory? Comment and share your stories below!

Are you concerned that you might be unaware of some of the same things happening to you?

Feel free to contact me for help on these matters at 805-217-0791 or david@djmcre.com

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WHY NOW IS NOT A GOOD TIME TO BUY COMMERCIAL REAL ESTATE

Now is probably not a good time to buy commercial real estate (“CRE”).  And I don’t say this lightly because I own a commercial real estate company and I don’t make sales commissions if I don’t sell CRE.  But, in my opinion, it’s the truth and it’s rarely spoken by brokers/agents to their clients.

Doubtful? Check out this article regarding the matter.  If there are 254 billion dollars with experienced CRE investors looking to buy CRE but they can’t find anything to buy and aren’t accepting any more money from investors, this confirms it’s probably not the time to buy CRE.

In my primary CRE market in southern California, it is particularly difficult to find any CRE purchase that makes sense.  Demand way exceeds supply here, inventory is very low, and prices are hitting new records.  There are better options out of state than in California, but many of my buyers don’t want to buy out of state because they want to manage what they own and want it as close to them geographically as possible.

However, it is a great time to sell CRE even if it means having to pay the capital gains tax.  Many of my sellers want to do a 1031 exchange, but it simply doesn’t make sense to buy another CRE property. Prices are so high for new CRE properties and a buyer will probably lose all of the gains made on the sale of their CRE property, especially when the CRE prices drop like they always do.

And here is another article regarding restaurant owners with multiple locations taking advantage of the high sale prices and selling the CRE that they own: HERE.

How you sell and market your property in this hot market will really make a difference on the sales price you receive. So, keeping that in mind, hire a broker that knows what buyers are hungry to buy in your market and who will overpay for your property. Find one that won’t just post your CRE property online and put up a sign on it.  The right broker is one that knows how to negotiate and has a proven track record of doing so with many years of experience.  The key is to find a broker that doesn’t put his desire for a quick commission above your interests, especially since selling a property for top dollar takes a lot of effort and time when done correctly.

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HOW LANDLORDS CHEAT TENANTS WHEN MEASURING THEIR LEASED SPACE

When was the last time you measured your leased space before signing or even renewing your lease to make sure that the square footage is correct?  You probably never have.  The landlord usually tells you what the square footage is and you accept it without taking this important step as obvious as it seems.  You should always measure the usable square footage of your leased space before you sign or renew your lease.  Measuring the common areas of a building is not usually practical though as it’s more expensive, complicated and time consuming to do this.

As a tenant leasing space, you usually pay on rentable square footage (RSF) but only actually use what is inside your space.  This inside space is called usable square footage (USF).  The RSF usually contains something called a load for the common areas.  This load is your share of the common areas such as restrooms, corridors, stairways, etc.  Most loads in office buildings are between 15-20% of the USF and if they exceed this number the building can start to become pretty inefficient.  Retail and industrial users should not have a load at all or a small one at best unless for some reason they have substantial common areas which aren’t the norm for these types of buildings.

I can’t tell you how many times I have found that the landlord has unreasonably padded the square footage number especially for the tenant’s share of the common areas.  Items like roof overhangs, penthouses, elevator shafts, etc. have been included.  Once I discover the padded numbers, I am able to get a reduction from the landlord on either the square footage and/or rent.  Buildings are valued on square footage so the more square footage the higher the rent and the higher the value of the building.  This means that the landlords usually want to maximize the square footage anytime they can.

BOMA 2010 is the current architectural standard for measuring buildings that landlords like to use but it contains optional items that can be added to the common areas like roof overhangs that many times should not reasonably be added.

It is not always easy to figure out how a landlord has cheated or creatively measured their building and your space.  Landlords usually hate to disclose this information.  But you should always push the landlord for full disclosure on this issue and require them to send you their measurement calculations.  Even then, you need to have someone with experience in this matter review this information to verify that it has been done correctly.

Hiring a broker with experience in measuring buildings can help.  It always pays to have your own broker represent you; especially one that is knowledgeable in this area and in other areas related to landlord profit centers that most brokers aren’t aware of or simply don’t have experience with like operating expense reconciliations and invoices.  Hiring the right broker and taking the time to figure out whether your square footage is correct or not will usually be worth it and you will save money.

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COMMERCIAL BROKER DUAL REPRESENTATION :  GOOD OR BAD IDEA?

Dual Representation is not legally allowed in many states.  Why?  Because it can’t be done without violating ethical issues as there are simply too many conflicts of interest.  The tenant/buyer loses big time and the owners and their brokers gain big time. This is why so many brokers and owners are in favor of it.

For 25 years I directed some very large real estate companies that owned millions of square feet of commercial property across the US and even internationally.  Many brokers wanted my business because I could give them 5 or 6 figure salaries off some of my properties in any one region that I controlled.  As a landlord, I loved it when my brokers were able to do dual representations because I had a great amount of leverage over the brokers who worked for me.  If they, or anyone in their firm representing a tenant/buyer, pushed too hard for a tenant/buyer at one of my properties –all I had to do was hint that they might not be able to keep my listings.  Would a broker risk losing a 5 or 6 figure salary working for me over one deal where they also represented the tenant/buyer?  Not likely.  That is all it took for the tenant/buyer to not get as good of a deal as they could have received had they used another broker from another firm; a firm that was not affiliated with a listing broker who worked for me or that wasn’t trying to get listings from me.  This is why dual representations shouldn’t be done.

Even though dual representations are legal in California, I won’t do them.  They should be outlawed.  Ask any good real estate attorney how it goes in court when they have to defend a broker for a dual representation. Attorneys that I have spoken with that have experience in this matter have said “it’s not a matter of whether they can win the case but rather of how much they can settle for”.  This is because these attorneys know that it is impossible for a broker to represent both parties correctly without fault.  Can you imagine an attorney who has represented a large property owner for decades attempting to also represent a tenant in a dispute in court?  It wouldn’t be possible to represent both parties fairly.  It doesn’t happen. This is the same reason why dual broker representation should not happen.

Every tenant/buyer should hire a broker that doesn’t have any conflict of interest with a landlord/seller or their broker.  The landlord/seller pays the tenant/buyer’s broker’s commission so it costs the tenant nothing.

Brokerage firms that specialize primarily in representing tenants/buyers are a very good choice because they don’t have the conflicts mentioned above.  If a tenant/buyer is thinking of representing themselves –that can potentially be even worse.  Hire an experienced broker who only has your interests in mind instead.  You will save a lot of time, money and headaches if you use the right broker.

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Outsource your commercial real estate department for free – and save money, time, and headaches

Frustrated by how much time and energy it takes to lease or buy commercial real estate (office, medical, dental, retail, industrial, etc.), whether you have to open up multiple locations across the US or even just one?

What to look for in commercial real estate deals

Although you’re great at what you do relating to your business, you’re probably not an expert at all the aspects of commercial real estate that affect your bottom line: Continue reading “Outsource your commercial real estate department for free – and save money, time, and headaches”

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Commercial Leasing: Never do it on your own

You are a business owner with barely enough time in the day to run your company, much less worry about real estate. Someone on your staff reminds you that your lease will be expiring in a few months, so you start to think about what that will mean. Mostly, your current space works for you. You might need more or less space and the carpet and the paint might need replacing but it works. You are comfortable and moving is a hassle!

At the same time, you begin to notice all of the “Available Space” signs on your way to and from your office some in nice buildings. Continue reading “Commercial Leasing: Never do it on your own”

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How to choose the right commercial broker/agent

Let’s face it – it is difficult to buy, sell, lease or manage commercial real estate properties without the help of an expert. Would you go to court without an attorney? Then why would you negotiate a lease without an expert representing you?

Hiring a good licensed commercial real estate agent is your best bet against losing thousands of dollars you will likely spend when you make costly mistakes, or miss out on solid commercial real estate investing opportunities.

That is why finding and hiring the right commercial real estate agent should be your first priority. Continue reading “How to choose the right commercial broker/agent”