Purchasing an office condo

I have a client who I am helping to purchase an office condo in the city of Irvine.  There are not as many good opportunities in financially strong and well capitalized projects as we would like to see. However, we do currently have an offer on a condo that is under 10K sq. ft.

Writing Articles can be a benefit

June 19, 2009

Writing articles can be scary, exciting and rewarding all at the same time! To be perfectly honest, I did not think I was able to write. Yes, I have a degree in Marketing and Finance and wrote articles after I graduated University, yet, I still felt I was unworthy…After I obtained my SIOR & CCIM designations, I was told by colleagues and my business coach that I should share some of my knowledge and experiences with others.

So, I wrote my first article (the scary part), presented it to the Lee and Associates PR company, The Hoyt Organization and low and behold the California Real Estate Journal published it! Well, that’s when the exciting part started! The rewarding aspect came with the fact that my “scribing” has made an impact on others lives. Case in point, a fellow broker asked if he could use one of my articles to show his client. 

Subject Article

It is also rewarding because it has taken me out of my comfort zone and allowed me to continue to (as a leasing director from The Irvine Company says) become “bigger, better & stronger”.

Yes, it does take time and commitment. Now, when I experience a situation that I think will benefit others if it is documented, I will share that adventure.

Commercial Real Estate Investors

Commercial real estate investors should avoid purchasing office buildings with low occupancy unless the seller is willing to accept a significantly discounted price. Wise landlords are doing what is necessary to get quality tenants into their buildings and the investor will quickly realize that it will become rather expensive to re-tenant the building. In order to woo tenants, the landlords may have to provide several months of free rent, increased tenant improvement allowances, broker incentives, moving allowances and other incentives.

Opportunities in Commercial Real Estate

The best commercial real estate opportunities now belong to owner/users of thriving companies. I am seeing some current owner/users being forced to sell their properties due to a decrease in business. Therefore, it becomes necessary for some of those owners to quickly sell their assets and minimize their losses; thus providing an opportunity for thriving companies to find some fantastic lending terms through the SBA to purchase a building.

Summary Recap on the RealShare Conference – March 5, 2009

SUMMARY RECAP ON THE REALSHARE CONFERENCE – MARCH 5, 2009
By Randolph T. Mason, CCIM, SIOR

I just returned from an intense educational and networking day in Los Angeles, California at the Real Share Conference. Since I had never been to this conference before, I wasn’t sure what to expect and I was pleasantly surprised. I met many past contacts who I haven’t seen in years and developed new relationships. I met bankers, presidents of companies, industry experts and public relations individuals. When I first arrived, I was introduced to GlobeSt.com by the Hoyt Organization. This turned out to be a lot of fun as GlobeSt created a video interview of me, which will be posted on the Internet.

The discussion panels were extremely interesting. They included many topics such as how to adapt to changing demands in the market and also a detailed office market update. Although I knew this to be fundamentally true, the speakers pounded in to us that now is not the time to get away from our core business. We should work in disciplines in which we are strong and we should cultivate our prior personal relationships that we have acquired. The speakers also emphasized the importance of continuing on the path of education during challenging times. Our Lee & Associates founder, Bill Lee shared an interesting thought. He talked about making sure we have a vision of where we want to be and to continue to become experts by educating ourselves and doing things we have not done before.

During these challenging times, we must focus on meeting people and getting to know them. No doubt they will have questions about their commercial real estate situations and we will be right there to lend a helping hand.

How Tenants Are Surviving These Tough Economic Times

As we all realize, tough economic times require tough decisions. In talking with many tenants and other advisors, the below is a summary of how tenants are surviving these challenging economic times.

If one needs to cut to the chase, the reality is most tenants are doing what they can to cut costs. This includes selective layoffs of non-key or essential employees, while at the same time, asking the rest of the team to handle the extra load, if there is any. I know of one company who has a total clerical and managerial staff of eight staff members, not including the twenty-five plus sales reps. While it was a very difficult decision, one of the clerical staff needed to be let go. The other staff members have had to increase their individual responsibilities in order to cover the downsized employee’s work load.

I recently spoke with another company that had a total staff of 35 people, occupied over 26,000 square feet in an office building and was required, due to funding sources, to reduce their operating costs by 50%. The subsequently have 15 employees and are attempting to sublease half of their space. Which brings me to the next strategy tenants are employing, subleases.

Subleasing is never the ideal situation if you plan on occupying a portion of your space and subleasing the remainder. Most tenants would prefer not to share space with another tenant if they have the choice. Security, privacy, pilferage issues, and many other concerns need to be addressed prior to making the decision to sublease a portion of the space. Unfortunately, it is often not practical to sublease a portion of the space as it cannot be easily reconfigured to provide adequate ingress and egress, individual control of the HVAC and other systems, including telephone and computer networks. It is also extremely important for the Sublessor (Tenant who is subleasing the space to another tenant) to react sooner than later. A very valued client of mine saw their business decrease dramatically and realized early on that they were going to need to sublease some space. I advised the client to go back to their Master Lessor to see if they would be willing to take the space back. My thought was, you never know unless you ask. It was determined that the Master Lessor did not want the space back, but would cooperate with the tenant in their hunt for a sublessee. The tenant chose not to actively market the space through a real estate professional, but to attempt to sublease space on their own. The problem with that philosophy is that in the event the tenant’s respective subtenant bailed, much valuable time was lost in the marketing of this space. As luck would have it, the sublessor’s perspective sublessee did go away. The space is now on the market for sublease to the general public. When there is such a glut of available space on the market and the activity level has diminished, it is prudent to offer prospective tenants and their representatives increased motivation to lease the space. Concessions that are common during these economic times include rental abatement or free rent, lower market lease rates, fixed operating expense pass throughs or none at all, leasing incentives for procuring brokers, fees to be spent on tenant improvements within the space, and other leasing incentives.

Other areas that tenants are using to survive this market include shorter term leases. We are finding that tenants desiring to renew their existing lease are opting for a shorter period of time. There are benefits and detriments to this philosophy. The benefits include a lower long term risk for a lease obligation should the market conditions continue to worsen and subsequently force them out of business. This is extremely important to consider should one have a personal guaranty for the lease. Personal guaranties can often be avoided if the tenant submits a large security deposit or letter of credit. This gives the landlord some security that in the event the tenant defaults, the landlord has some months to re-tenant the space. It would not necessarily be considered an ideal situation for a landlord in that they are signing the long term lease for the long term cash flow and would prefer not to go through the re-tenanting expense. Other tenants are dramatically scrutinizing their expenses line item by line item. I have one client that reviewed its income statement and more specifically the expenses literally, line item by line item. The goal was to reduce expenses in each and every area by 20%. The client talked about saving money on copies, by limiting the number of copies people need to make. He also talked about eliminating one of the copiers which in effect forced employees to walk a little further in order to make a copy. They eliminated the bagels and donut expense with a healthier option of apples and oranges. This was primarily done as a morale builder. In an effort to reduce the number of employees being laid off, they took a survey to find out which employees would enjoy part-time work. They were able to scale back some full-time employees to part-time employees which saved the company money along with giving the employees their desired work schedule. Another way this company saved money was by bundling the telephone, computer, fax and other telecommunication services with one vender. They shopped around and found the best alternative for their particular business. They were about to cancel their 401K plan, but instead implemented a matching funds idea, which helped encourage the employees to save more money.

The reality of today’s marketplace is that employers, employees, and vendors need to work together to survive through these tough times. When everyone understands that we are all on the same team this economic downturn will be minimized.

What’s My Building Worth Anyway? The Analysis of a Sale Leaseback

 

OCTOBER 13, 2008

What’s My Building Worth Anyway? The Analysis of a Sale Leaseback

By RANDOLPH T. MASON

I received a call the other day from a very well known company that wanted to take advantage of today’s marketplace by growing their core business. They were in the food industry – but that is irrelevant. The initial conversation on the telephone was: “What’s my building worth if I sell it to an investor?” My response was, “It is very difficult to give you a realistic number from a telephone conversation,” so I set up an appointment to meet with the chief financial officer.

During the meeting we took a tour of his facility, which was a benefit to him because he had a rather highly improved property which we believe could command a higher purchase price. After about an hour asking the client what his goals and objectives were, such as, what was he using the cash for, when did he need the cash, could he finance any of it, could he take deferred payments and many other questions, my business partner and I went back to the office and started our due diligence. In presenting an accurate value, we would include a low, realistic and high value. We needed to explain to the client the lease rates in the area because if a potential investor buys the property, the investor along with his banker need to understand the viability of releasing the property should this sale leaseback revert back to the investor. Also known as “if the seller defaults, lease payments are not made” and the buyer needs to find a new tenant for the property. So we showed the client the potential lease availabilities along with telling him about the lease comparables of transactions already completed. The next part of the education process had to do with presenting the existing for-sale availabilities and the sold comparables. Understanding the sold property information is important in that it would give the potential seller the realistic idea as to what an appraiser is going to be looking at during his or her appraisal analysis. I find that showing the sellers a realistic sale price gives them an understanding of how much money they could receive from a potential sale.

We then explained the “sale leaseback” opportunity knowing that the client would rather not relocate. Should this company sell its building to an investor, the investor is buying the income stream that this tenant or seller would be providing. The higher the income stream, theoretically, the higher the value. The challenge comes in that if the current owner agrees to an extremely above-market lease rate, the investor buys this income stream, then the seller goes out of business, the investor has the challenge of trying to release the property at an above-market lease rate – and that dog don’t hunt. That is why it is extremely important for the potential seller to understand the realistic lease rates so that they can better appreciate the investor’s point of view. Now in a sale leaseback if the potential seller signs a slightly above-market lease rate, and is an extremely well-capitalized company with a good track record, the differential between the contract lease rate and the actual market lease rate may be insignificant.

The last analysis we did was to give the client the opportunity of maximizing his sale proceeds by selling the property to an owner/user and relocating entirely; the current market could dictate that being the best alternative. If the market has a high vacancy rate, whereby landlords are offering interesting incentives to obtain a tenant, there could be a situation where the potential seller sells his property to an owner/user thereby maximizing his sale proceeds and then solicits offers from potential new landlords who may provide aggressive incentives such as moving allowances, free rent, excessive tenant improvement allowances and many other variations.

The meeting concluded by the chief financial officer taking the information we provided and having an indepth meeting with the board of directors. So, at the end of the day, the chief financial officer found out what his building was worth.

Randolph T. Mason is senior vice president of Lee & Associates’ Irvine office.

 

 

Commercial Property News

 August 25, 2008

Tenant Reps Say Sluggish Economy Means Changes in How They Handle Clients

 

By Gail Kalinoski, Contributing Editor

Miller said all firms, even those that are expanding, are trying to mitigateexpense. “We’re having some very interesting conversations with clients in terms of whether they should be expanding in place and renew or relocate to a side street or go south a bit and try to save money,” he said.

Faced with a sluggish economy, tight credit environment and softening office leasing market, tenant representation brokers say their roles have been changing in recent months. Several brokers on both coasts toldCPN they are increasingly taking on advisory roles as they help clients manage their space needs and expenses.

“There has been a significant amount of what I would call hand-holding and advisory services in guiding our tenants on the choices available should they need to make a decision,” said Marc Miller, executive vice president at Winoker Realty Company, a privately-held, mid-size commercial real estate management and leasing firm in Manhattan.

He said some clients are being more flexible and taking risks in deciding on where to rent and saving money by doing so. Miller cited a law firm client that needed space in Midtown. Miller said Winoker brokers showed the firm a prewar loft building on a side street across from the New York Times building at 620 Eighth Ave. “They took two floors, got two terraces and saved $18 a foot,” he said. “You have to take a risk that the tenant might not like it. This turned out to be a home run.”

Miller said one trend he has noticed has been increasing opportunities in the sublease market. “When recessionary language starts to buzz, sublet space becomes more than a trickle on the market,” he said, adding that he arranged a $65 per square foot sublease in the U.S. Trust Building at 114 W. 47th St., for a client that had relocated from a Midtown building where the firm was paying over $100 a foot. The Grubb & Ellis Inc. second quarter “Office Market Trends” report for New York City noted that tenants had placed more than 1.5 million square feet of sublease space back on the market since the beginning of the year. Grubb & Ellis said the overall vacancy rate in Manhattan rose 70 basis points from Q1 to Q2, the largest one-quarter jump since just after 9/11. In Manhattan, second-quarter vacancy rates ranged from 4.9 percent in Midtown to 7.2 percent in Downtown Manhattan. Rents are expected to remain flat for the rest of the year.

In California, brokers said they are also offering more advisory services to their clients – often that means helping the tenant decide between free rent and improvements being offered by more landlords. “We’re starting to see free rent in the picture. We haven’t seen that phenomenon in six or seven years,” Steve Holland, first vice president with the tenant representation group for CB Richard Ellis Inc. in the San Diego region, told CPN. Holland said he’s seen landlords offering 10-year deals with up to one year of free rent.

When the office leasing market was hot and landlords were in the driver’s seat, tenants typically had to absorb turnkey improvements when moving to new space or taking additional square footage. Now landlords are offering to pay for improvements and giving free rent. “The landlords are being a lot=2 0more aggressive, a lot easier to deal with,” Holland said.

Further north in Orange County, Randolph Mason, senior vice president with Lee & Associates Commercial Real Estate Services in Irvine, Calif., has seen the same trend and has been busy helping tenants get the best concession deals possible. “Three years ago, a landlord would say ‘we’re not doing anything other than carpet and paint. If you want anything else, you will have to pay for it.’ Free rent was non-existent. It’s changing,” he said.

In hard economic times, the brokers said tenants are watching their bottom lines very closely and are now more interested in building expenses and how that affects them. Brokers like Mason are educating them about the costs of electricity, maintenance and janitorial services, which is particularly important to triple net paying tenants. “As brokers, we’re trying to help them understand the expenses specifically of the buildings, trying to negotiate the expense pass-throughs or get a cap on those pass-throughs,” he said.

The office leasing market is particularly challenging now in Orange County, where many of the subprime mortgage lenders and other housing and financial services companies had offices. Higher energy costs and new office inventory hitting the market just as the housing sector was imploding and the credit market was tightening have exacerbated the market in Orange, Mason said. The second-quarter Office Market Trends report from Lee & Associates noted that the overall vacancy rate had climbed to 13 percent by the middle of the year compared to 8.4 percent at the same time in 2008. The Class A vacancy rate was 19 percent vacancy rate for Q2 2008 up from 9.8 percent the previous year and Class B came in at 13 percent, versus 8.8 percent in the second quarter of 2007. Approximately 4 million square feet came back on the market from newly completed projects and give-back space from downsizing tenants, according to the report.

Mason said he is also seeing more short-term leasing deals being done as both tenants and landlords want to see if the economy improves before they lock into a long-term lease. That’s different than in past years when not only would a client sign a long-term lease, the client would lease up for 20 to 30 percent more space than they needed at that time because they knew they would need to expand before the lease ran out.

In San Diego, 3 million square feet of new office construction hit the market last year and another 1.3 million is under currently construction, Holland said. “Our research group projected the vacancy rate will increase to 18 percent by the end of the year from16 percent,” he noted, adding that the overall availability was at 23 percent. Adding to San Diego’s problems is an unemployment rate of 5.9 percent, the highest the region has seen in 12 years, Holland said.

The glut of office space has led landlords to focus on keeping tenants by beginning lease renewal negotiations two to three years before the end of the current lease, he said. “Part of the challenge I have with my clients is is now a good time to do an early lease renewal or wait awhile to see if the market deteriorates. That’s the kind of conversation I’m having with my clients. Companies are really looking for advice. They want to know what is your strategy. What’s going to happen two to three years down the line?”

Holland said some of his clients think the market has hit bottom, but he doesn’t. Still for those companies who are looking for space, this is the time to do it. In addition to incentives like free rent and tenant improvement concessions, some average asking rents are dropping for Class A properties providing opportunities for companies in Class B space to move up, he said. “If you have a need now, this is the time to get out into the markets,” Holland said.

 

 

 

 

 

 

 

 

 

Another happy client!

Applied Utility Systems or AUS hired Randolph T. Mason, CCIM, SIOR to relocate it’s Orange County division to Aliso Viejo. They located an approxitmate 7,000 office suite located at 31 Journey, Suite 200.

The President, Mr. Gary Hessenauer was exstatic with the level of service provide by the team headed by Randy Mason.

Mr. Mason is a Senior Vice President of Lee & Assocites and specializes in representing Tenants and Buyers in commercial real estate decisions and can be reached at 949-790-3113.

Landlords are being aggressive

Just had dinner with a prominent Orange County, California landlord who was explaining his get it leased now philosophy.

He was discussing his approach as to give the potential tenant what they wanted within reason. If his space sat on the market an extra month or three, he would have been better off cutting the deal now and leasing his space. There were many types of incentives that can be offered and in many different ways…More than I feel like expaining this late in the evening…maybe in another post.