I work with a lot of agents and no one does that. I’ll absolutely work with you guys

Response dated March 23, 2023, when providing guidance on lease and sale options for an out of market building owner.

The backstory goes like this: Existing tenant notifies the owner of their intent to vacate. Ownership is aware of the Mid-Counties Industrial Team, Phillip DeRousse and Joel Hutak, due to a decade of active marketing in/around “The Market” (Santa Fe Springs, La Mirada, Norwalk, Buena Park, Cerritos, La Mirada). Prior to in-depth discussion, we request a preview of the building to discuss intelligently and accurately about the product. We then provide a list of suggested improvements to best position the building to sell or lease, in the quickest amount of time and highest value.

We suggested the following for this particular building:

Roof Quotes to repair and/or replace

Parking Lot Slurry Coat and Stripe

Update 5 Year Sprinkler Cert

Upgrade to LED Warehouse Lighting

Landscaping and Site Improvement

Roll Up Door Service

HVAC Service

Ownership did not have local, honest and available contractors to perform all of all these functions. No problem, we do! And, we will not only reach out to the contractors, we’ll meet them at the buildings for the walk through, procure a quote that is sent directly to the owner, and coordinate access for all work to commence. We then provided names and address’ of other clients and buildings where we have done the same.

Owner: “Wow, that would be very helpful. What do you charge for these services?”

Phillip and Joel: “Nothing extra, it is included in our service. You sign the listing agreement and that is enough for us.”

Owner: “I work with a lot of agents and no one does that. I’ll absolutely work with you guys.”

Within an hour of the conversation we had a fully executed listing agreement, began procuring quotes and producing marketing material.

I Don’t Want To Be The First But I Certainly Don’t Want To Be The Last

We were recently talking to a local investor that we’ve done business with over the years. In fact, we currently have two units available in one of their multi-tenant parks. The conversation was typical market updates, inquiries, tours, general activity type speak. He listened and responded with, “Has anyone dropped the price to get a tenant”? No, we responded. His reply, “Well, I don’t want to be the first but I certainly don’t want to be the last!” The ending comment was to reconnect in two weeks’ time. Followed by the suggestion that, If we don’t get any real leasing activity, we may have to be the first.

We’ve sent nothing but “Highest Sale Price” or “Highest Lease Price” marketing material for the past several years but it seems the party is over. The speed and depth of the correction is T.B.D.

Causes being, inflationary pressures, slowing retail demand for goods and services, all time high lease and sale rates and unless you’ve had your head in the sand for the last 12 months, increases in interest rates. The benchmark for many commercial loans is the 10 Year Treasury, which is nearly double the rate it was 12 months ago, 1.68% vs 3.5%.

With all that said, we don’t have sufficient data points to show trends but leasing and sales activity has slowed considerably and we anticipate lower lease and sale pricing forthcoming.

What’s this mean to you? Well, if you’re considering a sale or have an upcoming vacancy, prepare yourselves for more time on the market, lower lease rates and giving concessions to make deals.

Do you have any availabilities coming up this year? Are you considering selling your building? If you answered yes, we’re here to help with any strategic real estate planning!

Impact of Higher Mortgage Rates on Owner/User Buildings

For decades, industrial business owners throughout Southern California have been purchasing buildings for their own use. The concept first became popular in the 1970’s when developer Dunn Properties decided to sell individual buildings in their projects after experiencing sluggish lease-up activity. They were enormously successful in that effort, and it literally changed the industrial landscape to what we see today; hundreds of small to medium sized building projects all across the Southland.

There are several reasons for that success, which include controlling long term occupancy costs, diversifying personal investment portfolios and building equity through price appreciation and principal pay-down of debt. Simply put, many business owners choose to build wealth for themselves rather than their landlords. Since Dunn made their first sale offerings, thousands of individual fortunes have been made, and due to this real estate cycle’s massive price rise, those fortunes are, in many instances, beyond the wildest dreams of business owners who have participated in the owner/user model.

The prolific run-up in pricing that we are experiencing today has two basic components: undersupply of inventory and the lowest mortgage rates in American history. To lift the country out of the so-called Great Recession, the nation’s central bank lowered its benchmark Fed Funds Rate to zero to stimulate the flow of capital by reducing its cost. But, that wasn’t enough to get the desired result, so it began electronically printing money to buy US sovereign debt held by banks to further stimulate lending. That process is known as Quantitative Easing. That went on for several years and the Fed’s balance sheet ballooned to over $4.5 trillion. After a short hiatus, the Fed fired up the electronic presses again during the pandemic, swelling its balance sheet to roughly $9 trillion, where it stands today.

Inevitably, inflation has reared its ugly head and now the Fed is reversing course to slow it down by raising rates to slow the flow of capital by raising its cost. This has repercussions to the owner/user model, which have manifested in the form of higher mortgage interest rates. Just the threat of higher capital costs have given rise to a spike those rates. For example, the SBA 504 loan, the most commonly used in owner/user transactions, has gone from 2.4% a year ago to 3.92% today. In just the past two months, the 504 rate has risen 66 basis points. That’s a 20% rise in 60 days.

Higher rates mean higher interest cost for each dollar borrowed and that means one of the pillars of price support for owner/user buildings is weakening. The other, low supply, continues. The vacancy rate in most cities is under 1%. That has, thus far, kept prices moving up, as there are too many buyers chasing too few properties available for acquisition. However, we are now hearing more business owners express concerns over being priced out of their opportunities to become owner/users.

On the leasing side, low supply has kept lease rates moving up, as well. So, comparatively speaking, the cost between buying versus leasing is relatively unchanged. That means the owner/user decision, while more expensive than before, is still a viable option. The question is: at what point will the current inflationary spiral put enough of a dent in demand to depress lease rates and sales prices for industrial properties?

We don’t have an exact answer to that question, but we can look at history and conclude that such a time might be coming sooner rather than later. The more aggressive the Fed gets with reversing its long run of easy money policy, the sooner that time could come. The last time the Fed battled inflation like we have today, ended in a painful recession. If you were around in the late 1970’s and early 1980’s you probably have a vivid memory of just how difficult a time that was.

Are we certain to suffer a similar fate? No one knows for sure. But, we appear to be heading in that direction, and business owners are wise to prepare themselves for tougher times ahead. Our current situation may be a signal to buyers with a long term perspective to buy now while rates are relatively low, so they can lock in lower occupancy cost through the next real estate cycle. Or, it may be a reason for them to hold off on a purchase to retain capital they may need access to if the economy stumbles. Every business is different, but the result of each decision affects us all when aggregated.

For owners who are sitting on highly appreciated assets, this may be a time to dispose of their properties at or near a market peak, and reallocate their gains to fund retirement or reinvest in other asset classes to diversify their portfolios and reduce their risk profile. Again, every owner’s circumstances are unique and contain quality of life components that are worthy of serious consideration.

One thing we do know for sure is that planning ahead is a far better option than waiting for a problem to manifest before taking action. Good planning creates multiple paths to good outcomes, and protects against being forced to act defensively. We offer our assistance to you in developing a real estate strategy that reflects current trends and likely changes to market conditions. Just give us a call to get started.  

Tight Market Conditions Continue into the New Year

If you have recently been in the market for a good quality industrial building then you know first-hand just how tight market conditions are. Vacancy is at an all-time low, just .57% in the Mid-Counties region in Q4 of 2021. Why is this the case? Didn’t we just go through a pandemic that shut businesses down and sent our employees home? Didn’t we just send checks to most of our citizenry to help them meet their basic needs? Didn’t the SBA initiate multiple emergency loan programs to keep businesses from collapsing?

Yes to all of the above, but the industrial market seemed not to skip a beat (after an initial shock that lasted a matter of weeks) and continued its bull run of rising prices and lower vacancy. Now, space is even harder to find than it was two years ago and is considerably more expensive. Why? Let’s take a look at some of the main reasons.

First of all, it is important to know that the industrial market had been tightening for over a decade before the pandemic hit. The recovery from the Great Recession was the fastest and most prolific of all recoveries to date, and that helped to support the market through the pandemic. In retrospect, the COVID-19 crisis turned out to be just a minor speed bump in an upcycle that continues today. In fact, it can be argued that the pandemic actually accelerated the recovery due to the increased reliance on e-commerce to meet the needs of consumers from coast to coast.

Now that the general economy is back in growth mode, that sector continues to grow even faster, as online retailing is now even more widely accepted by consumers. There is little doubt that e-commerce is here to stay. That bodes well for industrial property investors, as e-commerce users primarily use industrial space to distribute their goods.

Initially, e-commerce users operated primarily out of large facilities in major distribution hub markets like the Inland Empire. They still do for the most part. But, competition has encouraged the e-commerce industry to speed up delivery times to capture market share, and that has led to more so-called “last mile” locations that are smaller and closer to the final destination of each package. This has, in turn, increased the demand for space in areas like Orange County and the Mid-Counties, adding pressure on supply, as other industrial sectors also continue to grow and compete for space.

It is not unlike the current supply chain issues we hear about in the news every day. Demand for goods is rising quickly while the supply side of the equation is playing catch-up after the pandemic-induced slowdown in production. Add the shortage of workers to move goods from the ports, and you’ve got a full-blown supply crunch on your hands.

Short supply is also the problem for the Mid Counties industrial real estate market. Strong demand from expanding businesses has absorbed essentially all of the existing inventory while the supply of new industrial inventory is at a standstill. So, why not just build more buildings to meet demand? Two reasons: the high cost and low availability of land. The Mid Counties is an “infill” market, meaning it is nearing full build-out with few sites remaining for ground-up development. That leaves the redevelopment of existing sites as the major source of new inventory, and there is just not enough of that in the works to satisfy the insatiable demand for space we are experiencing. Plus, many of the potential industrial development sites make more sense to developers of multi-family and mixed-use projects, further limiting the future supply of industrial space. Thus, the supply problem is likely to get worse rather than better going forward.

Scarcity has encouraged Mid Counties business owners to acquire their own facilities to reduce the risk associated with finding space in a tightening market. Owner-users are opting to pay record prices for buildings as a hedge against being forced out of the area when their leases would otherwise expire. They also tend to be long term property holders, which slows down the turnover of available buildings.

On top of all this, the existing inventory of industrial product is aging, most of it having been built in the 1970’s and 1980’s. As a result, a substantial portion of the space that does make its way onto the market has elements of functional obsolescence, which makes it unsuitable for the efficient operation of many industrial applications. So, from a practical point of view, the vacancy rate is actually even lower than is reported.

What’s next? Probably more of the same. Scarce availability, rising lease rates, higher sales prices. Until we have an economic event or combination of events that hits demand for industrial product hard, we are left to do the best we can with what we have. If you are a buyer or a tenant, get out in front of the problem. Always be looking even if your lease expires years in the future. If the right building comes along, pursue it now. Chances are your landlord would be happy to take the space back because you are probably paying well under current market lease rate. You are not as stuck as you think you might be..

In the meantime, gives us a call to discuss your current situation. We just might be able to help.

The Pros and Cons of the TBD Pricing Strategies

The primary goal of every potential seller of real property is to achieve the highest price from a qualified buyer who will follow through the transaction in a timely manner. That simple fact is not likely to change any time soon. Given today’s market conditions, you as a seller stand to achieve the highest price on record for your property if it is highly functional and well-located. Even if it’s not, you can still achieve a premium price due to the lack of available supply. The lowest interest rates in history and generally good economic conditions have been the key drivers behind the surge in pricing that began back in 2010. So, if you are contemplating the disposition of your property soon, there is a very good chance that you will walk away with a big win.

While there are many things to consider as you develop your disposition strategy, pricing is at the top of the priority list. You don’t want to leave money on the table by offering your property at too low of a price, but setting it too high can discourage market-savvy buyers from looking seriously at your property. The key is to set your price at a point that will garner broad interest to encourage competition without scaring good qualified buyers into looking elsewhere to complete a purchase.

This conundrum has led to an increase in property offerings that have no published sales price. So-called TBD pricing can be a viable strategy in certain instances, but we believe it is not the best way for the majority of property owners to maximize their sales proceeds. Let’s take a look at some of the reasons why we feel this way.

First, setting a price allows potential buyers to make a more meaningful comparison of your property to the competition. If your property is comparably priced, but has physical and locational characteristics that are superior to other available properties, potential buyers will be able to get a better sense of overall value. After all, whoever buys your property is looking to do the same thing you are, get the most from every invested dollar. If you don’t set a price, you remove a very important component of determining overall value. Your property may be the best building on the market and should command the highest price, but without a firm number, you make it more difficult for the buyer to come to that conclusion.

Secondly, you need to take into consideration the importance of timing. Vacancy is at an all-time low and few quality buildings are available for sale. Competition for the best properties is intense and buyers cannot afford to go after a “maybe” while other properties fly of the proverbial shelves. The most motivated buyers are pre-qualified for their financing and are ready to pull the trigger when they find the right building. By setting a firm asking price, you give them a clearer path to deciding on your building over someone else’s. If your price represents a good value, even if it is higher than other similar properties, a qualified buyer is more likely to enter into negotiations.

Thirdly, a specific asking price sends the message that you are a serious seller and not just an owner looking for an appraisal. It sends the message that the property is deliverable, even though final terms and conditions of a purchase are yet to be agreed upon. Too often we see TBD-priced buildings languish on the market, even with today’s supply shortage, because buyers and their professional representatives don’t take these offerings seriously. The most active brokers represent the most qualified buyers and they tend to steer clear of offerings that carry the risk of not being deliverable to their clients. A firm asking price sets the bar to begin negotiations and encourages the buyer to engage.

That said, there are times when TBD pricing is a good strategy. We will revisit this topic soon. Stay tuned.

A Two-Tiered System Emerges

Industrial business owners in need of space are heading into a stiff headwind these days. Vacancy has fallen to record lows and lease rates and sales prices have soared to all-time highs. In previous real estate up-cycles, developers responded by building new inventory to take advantage of supply/demand imbalances. But, that was then and this is now. Land for industrial development is either non-existent or it is being repurposed to allow for so-called “higher uses” like multi-family, retail and office. So, what still remains of industrial land has gotten very expensive and that has limited new development to the larger size ranges to create economies of scale.

While we have seen some state-of-the-art inventory constructed in recent years, it has been confined to just a few very large facilities designed to accommodate the explosive growth in the e-commerce sector and steady rise in container traffic at the region’s two major ports. Gone are the days of 10-building project with footprints as small as 10,000 square feet. In today’s world, construction of an industrial building under 50,000 square feet is rare and that has left thousands of area businesses to choose from a thin selection of aging buildings, most of which lack the features that are in highest demand.

That brings us to the concept of building class. You’ve probably seen building brochures and signs touting the availability of “Class A” space and wondered what makes a building Class A. The simple answer is that there is no accepted industry definition. Rather, the Class A moniker refers simply to buildings that are generally newer and more functional for local businesses in a given area. Thus, a state-of-the-art manufacturing building located in a distribution-oriented market would not be considered Class A due to its low ceiling height and lack of dock high loading capability. Likewise, a 32-foot clear distribution facility with an ESFR sprinkler system located 7 miles from the nearest freeway would not command the premium lease rate it would if it were a mile from the port.

The result of all this has been the emergence of a two-tiered pricing structure in the Mid-Counties market, for both sale and lease product. The best quality buildings, those with the highest ceiling height, good truck access and the latest in fire suppression technology, lease or sell in a matter of weeks at record prices. Business owners justify paying a rent differential because they need those features to maximize operational efficiency. Paying a 15% premium may be a bargain if the ceiling height in the building allows the user to stack product 8 feet higher and additional loading doors make product easier and faster to move in and out.

Unfortunately, the second tier is much bigger than the first. The Mid-Counties is a mature market. By that we mean that it is approaching full build-out and the vast majority of space is more than 20 years old. Yesterday’s Class A building is today’s functionally obsolete problem. Buildings with low-calculation sprinkler systems, low clearance and a bias toward ground level loading make up a disproportionate share of the available inventory, and those properties take much longer to move and, while still expensive,  trade at a discount in terms of price. As tenants have become more sensitive to operational efficiency they have gotten pickier in their choice of building. Some are renewing leases on a short term basis while they continue their search for a Class A building worthy of the premium they will be forced to pay. This is a viable strategy if they are fortunate enough to have a landlord willing to do it.

This bifurcated market is likely to continue. So, we think it’s a good idea to always be on the lookout for the building that truly fits your needs. That’s what we are here to help you with. So, please keep us in mind.

Game-changing Propostition Threatens Tenants

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As a tenant occupying industrial space, it is important for you to know about a looming threat to increase the property taxes passed through to you by your landlord. Necessary signatures have been obtained for a proposition to be placed on the 2020 General Election ballot that would split the property tax rolls and remove Proposition 13 protection for commercial properties.

Since 1978, the base levy for all real properties has been set at 1% of the acquisition price of the property, plus existing and future municipal assessments. The base levy cannot be increased by more than 2% each year. The so-called California Schools and Local Funding Act, would leave residential property and agricultural land under Prop 13 protection, but would allow for the annual reassessment of commercial property to full cash value for tax purposes. This would effectively eliminate the 2% annual cap on the base tax levy and expose taxpayers to large annual property tax increases.

Your lease most likely obligates you to pay all or a portion of the property taxes on the space you occupy. If you are on a net lease, you pay all the property taxes due during the term of your lease. If you signed an industrial gross lease, the property taxes for the “base” year (usually the first year of the lease) are included in your rental rate, and annual increases thereafter are passed through to you, either through a direct billing from your landlord in the case of freestanding buildings, or via an increase in your CAM charge (common area maintenance) that you pay along with your rent if you are in a business park.

The amount you pay for property tax is determined by what your landlord paid for the property. If he acquired it in the 1990’s when prices were low, chances are that your taxes are a fraction of what they would be if the property were acquired in the last year or two, when prices hit all-time highs. In fact, a typical 10,000-square-foot industrial building acquired in 1995 for $650,000 is probably worth $2,250,000 or more today.

Under the proposed law, that property could be immediately reassessed to its current value and the base levy would be increase to 1% of $2,250,000, more than doubling (after compounding 2% increases to the original base levy for 22 years) to almost 19 cents per square foot per month in a single year. That entire cost would be passed on to you unless you negotiated some additional protection against tax increases before signing your lease. But, with supply so tight and vacancy so low, few landlords are inclined to grant such a concession. If he did agree to pick up that increase of approximately $13,200 per year, it would reduce the value of the property by $264,000 at today’s market capitalization rate of 5%. If you were the landlord, you would probably dig your heels in on this one, too.

So, what does this mean to you going forward? It means you will be paying more for your next building unless property values head down, or the balance between supply and demand swings back in the favor of tenants and landlords are forced to lower lease rates or share the increase in taxes. However, even if the market does go through a correction and the vacancy rate tripled, it would still be in the 6% range. That’s how tight things really are today.

We have read the law and it is clear to us that the authors lack knowledge in terms of how the commercial property market works. Their intention was to stick it to wealthy property owners who they feel are taking advantage of a loophole by following a law that has been around for 41 years. The unintended consequences of their naivte could be disastrous to the industry, but we think it will pass anyway because the law is expected to generate upwards of $11 billion per year in additional revenue to schools and local governments. That means every school district, public employee union and local government will using its lobbying muscle to get the proposition passed. The opposition will come from commercial property owners and property services industries, which lacks the cohesiveness to mount substantial opposition. The vast majority of voters don’t own commercial property and are likely to vote in favor of raising additional revenue that won’t cost them a dime.

The issue is just now coming up on the media radar. We are doing our best to learn more and will pass information along to you as we get it. In the meantime, please contact us if you have any questions.

Joel Hutak

714.564.7169

jhutak@lee-associates.com

DRE# 01411356

http://www.linkedin.com/in/joel-hutak-6b2b933/

Phillip DeRousse

714.564.7141

pderousse@lee-associates.com

DRE# 01933061

https://www.linkedin.com/in/pderousse

Game-changing Proposition Threatens Owner/User Property Values

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As an owner/user, it is important for you to learn about a looming threat to industrial property values that we will all be voting on in the 2020 General Election. Necessary signatures have been obtained to vote on a proposition that would split the property tax rolls and remove Proposition 13 protection for commercial properties. This is the first serious threat to our current property tax system since 1978.

The so-called California Schools and Local Funding Act, would leave residential property and agricultural land under Prop 13 protection in place, but would allow for the annual reassessment of commercial property to full cash value for tax purposes. This would effectively eliminate the 2% annual cap on the base tax levy and expose taxpayers to large annual property tax increases.

If you have structured your industrial property ownership like most owner/users, you own your building personally and lease it back to your company. One of the key advantages of this structure is that you decide how the costs and income are allocated between you and your company. If you want more income on the personal side to accelerate the pay-down on your mortgage, you can raise the rent on your company. If you want to reduce your personal cash flow for tax reasons, you can lower the rent on the company and free up that cash to finance growth initiatives like hiring new employees or investing in new equipment. The choices are yours because you wear both hats, and that has been a key demand driver for industrial properties for decades.

But this proposition, which we believe will pass, is a game changer for owner/users. In an arm’s length investor scenario, the owner leases to an unrelated third party and passes the property tax burden on to the tenant in addition to rent payments. Investors with leases in place at the time the law passes will be insulated from paying higher taxes, at least until those leases expire and new leases are negotiated. Since you are both owner and tenant, that cost would fall to you and either drive up the operating cost for your business or reduce your personal cash flow.

Occupancy cost control is one of the main reasons the owner/user structure has become so popular. Business owners can borrow at low fixed interest rates for up to 25 years and Prop 13 tax rules fix property tax increases to just 2% each year. Interest rates are already on the rise and if property taxes increase sharply, the occupancy cost equation will be significantly impacted. This could reduce the demand for owner/user properties and precipitate an increase in supply of product at the same time, as more risk-averse owner/users decide to exit their investments. That double-whammy would put heavy downward pressure on property values, which are currently at an all-time high.

Those who own highly appreciated assets currently protected under Prop 13 rules will be hit the hardest and the fastest. The proposed law allows for the immediate reassessment of all commercial property. So, if you paid $750,000 for your building back in the 1990’s that is now worth over $2,250,000 today, your new base levy would rise to 1% of $2,250,000, or nearly triple what you currently pay. Not good.

Why do we think this proposition will pass? That’s an easy one. With $11 billion per year in extra tax revenue to schools and local governments up for grabs, you can count on every school district, public employee union and city government to back it with the full force of their combined lobbying power. Those opposed will be commercial property owners like you that have no common voice. Since the vast majority of voters are not commercial property owners, they are likely to vote for an increase in funding for good causes that won’t cost them a dime.

There is much more to discuss in terms of the impact of this proposed law. We will be sending regular updates as we learn more. In the meantime, it may be a good idea to take a fresh look at your investment strategy. We are just a phone call away to assist you in that effort.

Joel Hutak

714.564.7169

jhutak@lee-associates.com

DRE# 01411356

http://www.linkedin.com/in/joel-hutak-6b2b933/

Phillip DeRousse

714.564.7141

pderousse@lee-associates.com

DRE# 01933061

https://www.linkedin.com/in/pderousse

Split Tax Roll Proposition Coming Your Way

The so-called California Schools and Local Communities Funding Act, if California voters pass it in 2020’s General Election, would be a game-changer for Commercial Property owners. Tax rules for residential and agricultural property would remain in place, but the property tax rolls would be ‘split’ and properties designated for commercial use would no longer enjoy the protection of Proposition 13. Industrial, retail and office properties are specifically identified, but other types of commercial property like hotels and recreational properties are expected to fall within the new law’s shadow. Under the proposed law, commercial property could be reassessed every three years at a minimum, which means taxing authorities could simply not reassess for up to three years when market values are falling. We have read the law as proposed and it contains no mechanism for a property tax appeal process that is part of current law. The proposal makes a meager attempt to appear friendly to small business by exempting property owners who own less than $2 million worth of commercial property and whose businesses occupy the majority of the space in a property they own. The text of the law makes no reference to small third-party investors who own commercial property under the $2 million threshold. This is disingenuous at best, given the fact that 95% or more of commercial properties already have a value in excess of $2 million. The promoters of the proposition are using the well-worn mantra of “sticking it to the rich” who use loopholes to avoid paying their fair share. So, how will this impact the commercial real estate market? To be sure, almost every owner and occupier of a commercial property will be paying more. Long term owners, the group that enjoys the protection of Proposition 13 the most, will get slammed, as the proposed law would allow taxing authorities to immediately reassess their property to its current market value. That could double, triple or even quadruple the tax bill for these property owners in a single tax year. Tenants on net leases requiring them to pay all real property taxes, and tenants on gross leases that pass through tax increases to them over a base year, will all take a hit. Property values would likely fall immediately, especially for those investors and owner/users who pay their own property taxes as an operating expense, which reduces Net Operating Income, the amount capitalized to determine a property’s value. In those cases, every $1 in additional property tax decreases the value of that property by $20 at a current market cap rate of 5%. We will be following this issue very closely going forward and we will make sure to keep you informed.

Joel Hutak

714.564.7169

jhutak@lee-associates.com

DRE# 01411356

http://www.linkedin.com/in/joel-hutak-6b2b933/

Phillip DeRousse

714.564.7141

pderousse@lee-associates.com

DRE# 01933061

https://www.linkedin.com/in/pderousse

Why Are Sale-Leasebacks Trending?

As the local industrial real estate market continues to march along in what feels like zero percent vacancy, it’s actually 1.5% to 3.0% depending on which report you read and to what size range that report is geared, we are beginning to see a trend among owner-occupied buildings. Something we haven’t seen since mid-2000s, can anyone guess?

Sale-leasebacks.

If you have owned a building for 15 years, or have purchased in the last 5 years, you likely have a substantial amount of equity in your building. A tool to access that equity, short of selling the building and moving to another location – which can be costly and time consuming – is a sale-leaseback. You sell the building to an investor and remain in place as a tenant. The equity that was tied up in your building can now be used to grow your business, have a cash reserve for a rainy day, or buy a bigger boat than your neighbors.

Here’s the process:
• Step 1: Ask us what the current market monthly NNN lease rate is on your building
• Step 2: Multiple the NNN lease rate by 12 months for your annualized income
• Step 3: Divide by 5.5% (Current Cap Rates)

Example:
A 20,000-square-foot building that rents for $.80 NNN

20,000 sf x $.80 psf nnn = $16,000/mn x 12 months = $192,000 annualized income. Divide $192,000 by .055 (5.5% cap rate) = $3,490,909.00 ($175 psf)

The primary reason the sale-leaseback process now works is driven by two factors:
1. Low interest rates (search for higher returns than you would get at the bank has driven cap rates down into the 5% range)
2. Increase in lease rates

If you would like to discuss sale-leasebacks in more detail or would like to know current lease rates, please do not hesitate to contact us. We would appreciate the opportunity help out.

9/1/2016Current RateChange Since 6/1/163 Yr. Treasury.91-15%5 Yr. Treasury1.18-15.2%7 Yr. Treasury1.44-13.8%10 Yr. Treasury1.57-15.2%

For more information about the Industrial Real Estate Market in the Orange County, Los Angeles County & Surrounding Areas, give us a call:

Joel Hutak
Principal
714-564-7169

Philip DeRousse
Associate
714-564-7141

When There are No More Fish in the Fish Market…Go Fishing!

Joel Hutak and Phillip DeRousse had a requirement they needed to fulfill for one of their local, trusted clients. The client was looking to purchase an industrial building under 10,000 SF in the North Santa Fe Springs market.

At the time, there were no matching properties on the market; this is a very common problem in 2017, being that vacancy levels are below 1% in Santa Fe Springs.

A common response given to a client looking to purchase a building like this would be, “We will let you know when something comes up that matches your needs.”

Joel and Phillip used their passion for fishing the waters of the Pacific Ocean, relating it to their CRE expertise on the ground, and they went fishing!

Cold calling multiple building owners in a specific size range in a specific part of the city resulted in a property where the seller and potential buyer had aligned interests. Hookup!!!

“We were able to agree on a solid number for the property where the seller and buyer were both excited about the transaction,” said Joel.

In this case, time was not of the essence to “get the fish over the rail,” so a longer than normal escrow was agreed upon to eat up some time attached to the pre-payment penalty that the Seller was going to have to endure.

This wasn’t the easiest of battles on or off the water. The property had a lease in place with a tenant that initially expired more than six months out. In addition, the tenant had an Option to Purchase the Property.

In today’s age, most people would think there are too many snags and snares in the transaction and move on.

With a fisherman’s persistence and patience, Joel and Phillip assisted the Seller in navigating through these obstacles. After negotiations, the tenant waived the option to purchase the property, and in turn, the seller and tenant agreed to advance the lease expiration date by four months.

This was a plus for the seller, tenant, and buyer. This was an off-market sales transaction completed by the Mid Counties Industrial Team of Lee & Associates Orange of the property at 11945 Rivera Road, a 6,792 square-foot industrial building in the city of Santa Fe Springs, California.

For more information about the Industrial Real Estate Market in the Orange County, Los Angeles County & Surrounding Areas, give us a call:

Joel Hutak
Principal
714-564-7169

Philip DeRousse
Principal
714-564-7141

Be Prepared for “You Better Jump On This One”

I have heard business owners say, “I’ve moved my business before, It won’t cost that much or take that much time to sell, I know what I am doing.”

The industrial real estate brokerage community at large has been saying, quarter after quarter after quarter, that the “market is tight.” “It’s one percent vacancy.” “Rents are going up,” etc,. Although this is true, the noise has been the same for so long now that it seems to have turned into white noise. It has taken tenants and buyers losing out on one or more building opportunities to realize that we’re being honest when we say, “You Better Jump On This One.”

Before the jump, remember that preparation is the key to success when it comes to the rapid sale of commercial real estate. There are several reports to help you stay ahead of the game.

Necessary Paperwork

• ALTA surveys

• as-built drawings

• Phase 1 and 2 environmental assessments

• property condition reports

• zoning reports

• insurance studies

• tenant lease files

• income/expense reports

• appraisal

• earning potential statements

• financial details

• surveys

• loan documents

Check Title

• obtain a preliminary title report

• pay or dispute any overdue taxes or liens

• search for any pending lawsuits (extremely time-consuming)

• research for covenants, conditions, restrictions, or other ongoing obligations

• investigate for a discrepancy in ownership

Taxes

• plan for and structure a 1031 tax-deferred exchange if the seller intends on

• selling the property as part of this type of transfer

• check if all members or indirect owners agree to this proposal

• possibly restructure ownership before sale

Property Preparation

• interior cleaning

• exterior cleaning

• landscaping

• parking area repair

• window cleaning

• roof report and/or repair, if necessary

• specific small improvements, if needed

• HVAC inspection and report

Real Estate Agent

Property owners may choose to sell their property themselves, however here a few reasons why licensed professionals, such as Hutak & DeRousse can be of service to you in your area.

• Access to appraisals of similar properties

• Comparable sales

• Marketing tools & Materials that produce a Sale

• Multiple Listing Services

• Maximize Exposure to Buyers

• Evaluating Legal Disclosures, Contract Negotiations, and Escrow

• Management

• Local Market Experts and Off Market Properties

Hutak & DeRousse, a Lee & Associates Team, have real solutions to all of your property needs.