Why Promising Commercial Real Estate Deals Fail – Orange County Register


The commercial real estate market has taken on a whole new feel these days. Gone are the buyer-led bidding wars caused by too few buildings being chased by too many residents – the classic supply and demand imbalance.

The first five months of 2022 were at warp speed. We hit a big speed bump named the Federal Reserve.

As you know, the Fed has raised interest rates to curb rampant inflation. Buyers felt bold to act like buyers. Personally, my team is feeling the ramifications as 3 of his deals were canceled on Alter. It certainly shook.

Our recent divorce was a closed transaction and a private investor looking for a suitable upleg purchase. He will have to sell his estate in his June and redistribute his earnings to capital defer his gains tax.

When we scoured the universe of available lease buildings, we settled on a single-tenant pure-lease industrial building ideally located in Southern California. What I found in the search area was a lot of sale plus leaseback. After all, a net rental property is created by an occupant who needs equity from one or two owner-occupied premises. The latter was the origin of our trade implosion.

So I thought it would be worth a column to review sale/leasebacks and some things to consider when pursuing them.

I recently advised a number of clients to consider selling their commercial property and entering into a 3- to 10-year lease with the investor who bought it. Some have heard.

This structure is known in our terminology as a sale-leaseback. Unlike straight leases, which are not short-term leases that correspond to purchases, sale-leasebacks offer the owner the opportunity to sell at the current high price and stay in the building, albeit as a tenant, avoiding moving.

It’s a clever arrangement when the right motives are involved.

But let’s also talk about the downsides of sale-leasebacks.

Message to send: When a sale-leaseback is listed and put up for sale, the buyer’s question is, “Why is she selling?” ?”

In general, there is a story, and understanding that story is important. Why would the seller sell and what would be the financial situation? Our challenge these days was the creditworthiness of our residents and the sea of ​​red ink we were asked to navigate.

rent: Value is determined by taking the rent the company is willing to pay and packaging that payment as a return on investment. Simply put, if a company pays $10,000 a month or $120,000 a year and has a 5% return, the resulting value is $2.4 million. It’s easy?

Now the fun begins. Where does $10,000 a month compare to other comparable building rents? It’s above or below or on par. If it’s subpar, you’re golden. Above and you are scrambling. See, investors are looking at a worst-case scenario: if a resident spit the hook out a year later, can’t pay the rent, and worse files for bankruptcy, you’re in a building you can’t rent from. I’m stuck with… the same amount she was paying. This was our conclusion in a failed transaction.

Operating companies are in trouble: One of the benefits of owner-occupied real estate is the ability to handle difficult situations.

As an example, we own an office building. We are owners and tenants. When our revenue dipped in 2009 and 2010, we simply reduced our monthly payments. When an investor at arm’s length enters the fray, you’re just a tenant and you lose flexibility.

In the canceled scenario above, the rent was increased to get the maximum dollar from the sale. The problem was the rent was unsustainable.

Tax impact: As we have discussed, selling high value commercial real estate will result in heavy taxes unless tax deferral exchanges are employed. Yes, the stock will be supplied, but at a significant cost, up to 35% in some cases. You may be wondering why this matters. Unless the seller considers these consequences carefully, trading may come to a screeching halt.

Luckily, we’re still involved and moving on to the second possibility. Then we’ll see.

Allen C. Buchanan (SIOR) is a Principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at his [email protected] or 714.564.7104.



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