Jerry Roche

Sunday, 26 October 2008 20:00

Zoning out

Local and regional government authorities play a big role in your company’s real estate selection process; knowing how to work with them can open up many doors.

“We have several different levels of government in Michigan,” says Giancarlo Pinterpe, senior vice president of the Industrial Group at Grubb & Ellis Company. “Cities, townships, counties, the state — the bureaucracy can be daunting.”

Some administrators are more pro-business than others and offer incentives and tax abatements. Planning and zoning boards can make or break a project, and city ordinances and timelines can seriously affect your bottom line.

The process may seem overwhelming, but an experienced real estate broker can help your company navigate the process.

Smart Business talked with Pinterpe about working with government authorities to ensure the best real estate solution for your firm.

What role do government administrators play in real estate policymaking and subsequent decisions?

When brokers consider a client’s requirements, they’re thinking about where the company would best fit, minimizing moving expenses, negotiating tax incentives, and researching brownfield and renaissance zone opportunities. Government administrators play a significant role in all of these things and may vary amongst themselves in mentality.

Planning boards, which regulate master plans and review them with third-party engineering companies, also must be considered.

Zoning ordinances also are important. The language might be strict or ambiguous, allowing the zoning board to approve or reject certain uses for properties within the zone.

For instance, a few years ago, one of the townships I cover realized that many of its industrial buildings would sit vacant because the automotive industry is consolidating, so it reworded its zoning ordinance to include uses that would not traditionally fall into the industrial category. An array of ancillary businesses like gymnasiums, service/retail businesses, dance studios and even shooting ranges — normally considered higher commercial-type uses — flocked to the township.

How can government incentives and tax abatements make a difference?

Companies meeting certain criteria can negotiate tax abatements and other incentives. Additionally, properties can be approved as brownfield sites, which are typically functionally obsolete or have environmental issues, or be located in a renaissance zone, which provides tax incentives designed to spur investment in a particular area. Examples of incentives include the following:

  • exemption from the single-business tax, which is based on number of employees, total payroll, new jobs created and type of use of the property;

  • abatement of up to 100 percent of the usual real estate tax;

  • abatement of up to 100 percent of the usual personal property tax for new equipment; and

  • reimbursement of roughly 10 percent from the state on brownfield projects more than $10 million.

Keep in mind these incentives don’t last forever — they usually expire seven to 12 years after the date of issuance.

When municipalities or governments are involved, how much advance time is needed to seal a real estate deal?

On average, it takes between nine and 18 months for a new building, depending on where you’re going to locate.

However, the timeline may vary between municipalities. For instance, one municipality might give building permits within a few weeks, while another might take six months or more. I can have a company in and up and running in one municipality before anything even gets approved in another. Overall, the earlier you get started, the better because then you can cover everything and make sure it’s done right.

Of what value can a broker be in the real estate selection process?

Politically, having existing relationships with government authorities is a huge step toward breaking down barriers and capturing incentives. A good broker has a leg up in the negotiation process because of the trust that he or she has established through past performance.

Another consideration is experience. Some municipalities, for example, might be less attractive to real estate professionals on behalf of their clients because they are too difficult to work with from a use or rehab standpoint, because they can’t comply with established timelines or simply because they aren’t as pro-business.

The smart approach is to develop criteria upfront with a qualified real estate broker. It should include a business plan, anticipated growth and overall philosophy of the company. Real estate agents cannot circumvent the legal process of government approvals and timelines thereof, but they can prepare their clients to make informed decisions, maximizing investments and minimizing risks.

GIANCARLO PINTERPE is senior vice president of the Industrial Group at Grubb & Ellis Company. Reach him at (248) 350-1192 or giancarlo.pinterpe@grubb-ellis.com.

Thursday, 25 September 2008 20:00

Your best option?

Gary Pemberton, litigation partner at Shulman Hodges & Bastian LLP, is always amazed at how often businesspeople negotiating a contract consider arbitration clauses to be the Holy Grail.

“I think that’s a mistake, because arbitration is not necessarily the best vehicle for every type of dispute,” he says.

“Before you even place an arbitration clause in a contract, put a lot of thought into whether it is right for the deal you are negotiating. If it is, try to visualize what kind of potential disputes could arise with the contracting party, and then tailor the clause to address those contingencies.”

Smart Business talked to Pemberton about the pros and cons of arbitration clauses.

What are the advantages of arbitration provisions in contracts?

One is privacy. Unlike litigation, arbitration does not involve a public filing, a public litigation and a potential public trial. It is conducted behind closed doors, generally with no court reporter, there’s no file for the public to review and, generally, the decision is kept confidential.

Arbitrations also tend to be quite informal, rules of evidence are relaxed and discovery is limited, making them typically less expensive. They are also more convenient; you can agree on an arbitration date and be fairly certain that the case will be arbitrated the day that it is set.

If the matter is complex, you can select arbitrators that have expertise in the matters being litigated, unlike a court proceeding where the jury won’t and the judge may not have that expertise.

One of the nice things about arbitration — especially with two parties that want to continue to do business together — is that it tends to be more civilized. Unlike court litigation, there’s usually not as much acrimony and good business relationships don’t go down the tubes.

What are the disadvantages?

Things go wrong. The reasons that companies originally wanted to arbitrate turn out to be diametrically opposed to what actually occurs.

First, arbitration is not always quicker. Simply whether a case is required to be arbitrated may be litigated itself. If the parties do not agree that the arbitration clause is enforceable, you can spend a year litigating whether the clause is applicable. Arbitrations also can get expensive. Arbitrators can bill out at $3,000 to 5,000 a day for their services. For a panel of three, that’s a lot of money — especially where, unlike California state courts with their fast-track requirements, there is no formal incentive to efficiently use time and move a case along.

Unlike a court trial, there’s generally not a mechanism to dismiss a meritless case with a summary judgment procedure. Even the most frivolous arbitration cases may be taken all the way to a hearing.

Also, there is no mechanism to compel third parties who belong in the arbitration but were not parties to the arbitration agreement to be brought into the arbitration.

Results can be less predictable since arbitrators are not required to follow the law and there is no right of appeal simply because the arbitrator gets the law or the facts wrong. There’s also the belief that arbitrators tend to compromise too much.

Because there’s no right of appeal from an arbitration award simply because it is wrong, you can be stuck with a bad the decision, whether it’s right or wrong, unless you can demonstrate it was the result of fraud or the arbitrator is not truly impartial. (It’s believed — at least by some attorneys — that not all arbitrators are truly neutral. They are human like everybody else, and in order to continue getting business from companies or attorneys involved in a lot of arbitration disputes, they don’t want to make those companies and attorneys terribly unhappy.)

What factors should a company consider before deciding to put an arbitration clause in a contract?

  • If a dispute develops, who will have the evidence? If your adversary in an arbitration will have all the witnesses, evidence and documents, not having significant discovery can be a substantial detriment, and arbitration may not be right for you.

  • Do you want to have summary judgment and adjudication procedures included in the arbitration clause? When you’re involved with a party that historically files frivolous lawsuits, it’s wise to do so.

  • How is the other party in the contract viewed in the community as opposed to your company? If your potential opponent has a great reputation, you might not want to be in front of a jury and might want to go the arbitration route.

  • How crowded is the local court’s docket? If it’s heavily congested, it’ll probably take longer to get the matter resolved than an arbitration would take.

  • How important is your company’s public image? Arbitration’s privacy will minimize the impact of litigation on your company’s image.

  • Will the issues in a potential conflict be simple or complex? If complex, you might want the expertise of an arbitrator.

  • Is there a concern about potential punitive damages? Juries are more likely to become impassioned and hand out punitive damages, sometimes excessive. Arbitrators tend to be more reasonable and less emotional than juries.

GARY PEMBERTON is a litigation partner at Shulman Hodges & Bastian LLP. Reach him at (949) 340-3400 or gpemberton@shbllp.com.

Thursday, 25 September 2008 20:00

Market intelligence

Wholesale prices shot up 1.2 percent last month. The Dow-Jones stock market index fell 96 points yesterday. The average temperature of the Earth rose by 0.74 degrees Celsius over the last 100 years. During the last five years, the overall vacancy rate for commercial buildings in downtown Dallas has hovered between 27 percent and 31 percent.

In this so-called “Information Age,” we are bombarded by statistics, charts, graphs and outright trivia almost every moment of every day. But in order to take full business advantage of this mountain of information, we have to know how to interpret it — especially in the real estate market.

“Information has certainly become a competitive advantage,” says Ariel D. Guerrero, Assistant Vice President of Transaction Services and Client Services Manager for Texas based in Grubb & Ellis Company’s Dallas office. “In today’s volatile economy, commercial real estate investors and asset managers must be able to accurately assess trends, analyze their portfolios and evaluate options to ensure they make effective decisions that maximize investment returns on an ongoing basis.”

Smart Business spoke to Guerrero about how information plays a vital role in making crucial real estate decisions.

What research is available, and how can it be used as a competitive advantage?

Up-to-the-minute property, economic and GIS mapping/demographic data can be accessed from various subscription services, including Costar, Loopnet, Xceligent, Catylist, REIS, Moody’s Economy.com, Claritas and other research tools.

By integrating all these data sources and utilizing proprietary reporting tools that provide advanced analytics, informed decisions can be made based on up-to-date information and their impact on future returns. To remain competitive, leading firms have been implementing information management and analysis tools that provide aggregated data as well as automated distribution of information to clients.

What can be gleaned from raw research data?

Custom and published market reports are produced highlighting and analyzing the commercial real estate markets on a quarterly basis. Within these reports, vital information related to the health of the markets is presented, including — but not limited to — rental appreciation/depreciation, net absorption, current construction, vacancy rates and any other information that a client would need to assist real estate decision-making.

What is digital marketing, and how does it affect the quest for lucrative real estate opportunities?

In the rush to close more deals expeditiously, technology has certainly played an important role in streamlining the commercial real estate sales process. Digital marketing has helped brokers realize efficiencies in cost as well as time. For example, most marketing materials for investment properties are most often condensed to property-centric Web sites and/or virtual online areas known as ‘war rooms’ where due diligence information can be uploaded in a secure manner, which allows users 24-7 access to the information they need to keep the transaction moving. Brokers can use these services in their marketing so they can truly stand out from their competitors in this highly competitive industry.

How has the economy driven the demand for proprietary information?

There seems to be an inverse relationship that exists between economic performance and the demand for information. When things are going well, people are less inclined to ask questions and dig deep.

The booming commercial real estate market of years past caused a relative level of complacency with regard to access to critical market data. However, with the credit crunch and slowing national economy, there is a sense of urgency that drives a growing demand for reliable market information.

What kinds of exclusive information are available to qualified and experienced agents but not to the general public?

Competent advisers utilize proprietary research capabilities and analysis, extensive property databases and proven negotiation skills to create transaction opportunities that support their clients’ business objectives.

In what ways can an adviser assist interested parties with their decision-making?

An adviser can assist clients in their decision-making by applying real estate strategies to business imperatives: changes in ownership, market shifts, changes in business focus or regulations, expansion/consolidation initiatives, and procurement or outsourcing initiatives.

ARIEL D. GUERRERO is Assistant Vice President of Transaction Services and Client Services Manager for Texas in Grubb & Ellis Company’s Dallas office. Reach him at (713) 599-5112 or ariel.guerrero@grubb-ellis.com.

Tuesday, 26 August 2008 20:00

When customers go under

These are turbulent times, says James C. Bastian, Jr., a partner in the law firm of Shulman Hodges & Bastian LLP. “Bankruptcy is back in a big way.”

According to a report in the Los Angeles Times, more than 90,000 bankruptcy filings were made in March of this year, the highest since insolvency laws became more restrictive in October 2005. Filings in March were 30 percent above those of March 2007. And California led the nation with a 42 percent increase in bankruptcy filings at an annual pace in the first quarter.

The sad fact is that one or more of your customers may be in financial trouble at this very moment. Financial trouble that could result in a bankruptcy filing, affecting your own company’s near-term cash flow.

“Evaluate the situation,” Bastian says. “If you feel you’re getting the runaround, and if you’re hearing things you never heard before and if you’re dealing with an industry that is risk-laden, you can no longer assume that your customer can pay you. At the first sign of trouble, you need to be aggressive. Even the companies with the best intentions will string you along and put you in a worse position.”

Smart Business talked to Bastian about the steps you can take to avoid getting burned by deadbeat customers.

What are the first signs that a customer may be in the initial stages of filing for bankruptcy?

Industries like automotive, food service, restaurants, real estate and certain segments of the retail market are struggling. So are any industries that are more sensitive to the recent dramatic changes in fuel costs.

If your business is related to an industry that is generally in trouble or on the edge, you need to be more aware of possible bankruptcies than you have ever been, monitor your receivables and not deviate from your normal collection schedule.

When a good, long-time customer pays late or doesn’t pay at all, should you assume the worst?

There is always that balance between wanting to accommodate your customers and clients versus not getting extended to the point where your company’s economic health is being affected.

For a long-time customer, you might extend payment terms , but you still must maintain a normal collection schedule. In this economic climate, you cannot take for granted that customers will be able to keep payments current. You have to assume that there is always a possibility — greater now than ever — that the company you are dealing with will end up in bankruptcy.

You also cannot let any personal relationships with customers interfere with smart business decisions — and some companies struggle with that.

When are you at risk to have to return payments made from a company that ends up in bankruptcy?

When a company files bankruptcy, any payments you have received within the 90 days before the bankruptcy can possibly be recaptured by either the trustee or the company in bankruptcy through a preference avoidance action. Bankruptcy law allows creditors to be sued to bring that money back under many circumstances and spread it evenly among all the claimants. There are some things you can do that may give you a defense, including reaching a written agreement for new payment terms or language in your initial agreement that allows you to change payment terms.

It can even pay to sue a customer whose payments have fallen behind. If you obtain a judgment lien and it’s in place for more than 90 days before the bankruptcy filing, you can jump ahead of other creditors and possibly be first in line for any distribution.

If bankruptcy seems inevitable, you may be better off pursuing collection and getting a judgment to put yourself in a better position. Even if you get a judgment, you need to be flexible enough to accept less than that full amount — because that may be all you get. Recovery for unsecured creditors may be very, very minimal, so it may be far better to get 30 or 40 cents on the dollar than pursue litigation and obtain a worthless judgment.

What happens after a customer files for bankruptcy?

Creditors receive notice of the bankruptcy filing in the mail. When that happens, you need to gather all invoices, file a simple one-page proof of claim with the bankruptcy court and attach your documentation. That puts the court, other creditors and the company on notice that you have a claim.

Then you must closely monitor the bankruptcy case. You do not necessarily need to hire an attorney in every case because you can incur a lot of fees. If the bankruptcy distribution amounts to practically nothing, you don’t want to throw good money after bad.

Creditors in bankruptcy receive notices with language — possibly veiled in legalese — that will affect your legal rights. If you consult a lawyer, he or she might see something that needs attention and deal with it as necessary. But good lawyers will only charge for acting on your behalf on issues that really affect you and should not nickel and dime you on every piece of paper that comes across their desk.

JAMES C. BASTIAN, JR. is a partner in Shulman Hodges & Bastian LLP. Reach him at jbastian@shbllp.com or (949) 340-3400.

Wednesday, 25 June 2008 20:00

Corporate sale leaseback

Any business, no matter what the economic cycle or stage of growth the company is in, is looking for ways to free up capital and increase flexibility.

“Any business that owns real estate should evaluate a corporate sale lease-back transaction as an efficient means to accomplish some or all of these objectives,” says Patrick Shannon, vice president of the Investment Group at Grubb & Ellis in Detroit.

The economy is still in a state of near-recession, so investors are looking to diversify their portfolios. Commercial real estate is an asset class that more and more investors have gravitated to over the last 10 years.

“There are still far more investors in the commercial real estate arena than there were 10 years ago,” Shannon says. “Corporate sale leasebacks are attractive options to real estate buyers because of the immediate cash flow and long-term value of real estate. Businesses, meanwhile, are open to corporate sale lease-backs because they are a commonly accepted and economically efficient means to raise capital.”

Smart Business talked to Shannon about the benefits and drawbacks to a sale leaseback agreement.

What exactly is a corporate real estate sale leaseback?

In its simplest form, a sale leaseback is a financial transaction whereby a company sells its real estate to an investor, who then leases the property back to the seller. Typically, the leaseback term is for a period of 10 to 20 years and is structured under a triple net lease.

How are that and other sale leaseback terms determined?

The two most significant negotiable factors of the sale leaseback transaction are the price and the rental rate. Factors that influence price and rental rate include the market rent and values, comparable sales, the tenant’s creditworthiness and the length of the lease term. The longer the lease term, the more the pricing becomes influenced by the credit of the tenant. The shorter the lease term, the more influence market value and market rent will have on the property.

With many variables subject to negotiation and market influence, it is important to fully comprehend the ‘big picture’ of the deal structure to ultimately negotiate terms most favorable to you.

What are the benefits of a corporate sale leaseback?

The sale leaseback turns noncore assets into investment capital. The transaction is essentially an alternative financing method that provides up to 100 percent of value, whereas other financing methods may have a threshold of less than 100 percent of value.

What are some of the drawbacks?

From the buyer’s perspective, there are obvious risks. The tenant can choose to leave the building, the tenant might not maintain the building to marketable standards, or the tenant might go into default on the lease. But all of those factors are examined before the agreement is signed, and their risk is priced accordingly.

From a corporation’s perspective — the seller’s perspective — one risk is that you might grow out of the property, but owning the property wouldn’t change that. If real estate values jump, then there could be seller remorse. Real estate values could go south, too, making a sale lease-back an even better strategy.

Other risks include a lease that may limit your ability to make structural improvements and reaching the end of the lease’s term without renewal options.

What about timing? Would it be better to do a sale leaseback now or wait until the market improves?

A business argument can be made for doing it now. You want to put all your money into the core business to yield the largest return possible. That’s a good decision at any time. The cash proceeds from the sale may not be as great, but the return on your business investment might well be better.

The current market is tending to lengthen lease terms. That gives the buyer more stability, but if you’re looking for a longer term anyway, such an arrangement could serve your needs.

Experienced real estate agents can help clients understand those factors based upon their experience. They can judge how the market can perceive each of those items and reasonably estimate expected proceeds based on various sale leaseback terms.

PATRICK SHANNON is vice president of Grubb & Ellis Company’s Detroit Investment Group. Reach him at (248) 357-6593 or patrick.shannon@grubb-ellis.com.

Monday, 26 May 2008 20:00

Extend your commitment

Spurred by a softer real estate market, recasting leases — renegotiating them before term’s end — is becoming more common and more beneficial to tenants and landlords alike. While recasting often saves money, it doesn’t require any more due diligence than you would normally have to undertake later.

“Your lease is an excellent place to look for cost savings,” says Daniel Canvasser, CCIM, an associate in Grubb & Ellis Company’s Detroit office.

Adds Senior Vice President Ray Husband, “However, before recasting a lease, you should be satisfied with the building because you will have to take on additional term. Admittedly, you are taking a chance on market fluctuations, but I would be surprised if the market gets any weaker.”

Smart Business spoke to Canvasser and Husband about the opportunities that recasting a real estate lease creates.

Is recasting a lease normally something that occurs to corporate executives?

Husband: It may or it may not, depending on whether they approach real estate decisions strategically. Typically, real estate brokers have to approach executives and explain the process, show them where the market is today versus when they signed their lease and show them the savings that can be affected by recasting. Before the market went soft over the past couple of years, the early recasting or renegotiating of a lease really wasn’t an alternative. But today, a company can save a significant amount by recasting leases that have been in place for five to 10 years.

Canvasser: Because real estate is one of the largest overhead costs, it’s an easy way for companies to immediately reduce operating costs and overhead. Brokers can do a full lease analysis, which involves reviewing major terms and conditions, operating expenses and additional costs. They can show executives how the market at that time affects lease rates and conditions.

What are the benefits of recasting to tenants?

Husband: The first benefit is related to economics: the ability to lower lease costs. The second benefit is seeing if the space is being used efficiently and if there’s an opportunity to reduce total square footage. When employee layoffs are involved, a company may be stuck with excess space.

Canvasser: A major market trend is toward less square footage. If brokers need to bring in an architect or a space planner to increase space efficiency, they will do so.

What are the benefits to landlords?

Canvasser: Because there’s so much availability in the market, if your landlord can secure your commitment well before the lease expires it takes away the possibility of you shopping the market, thereby increasing the landlord’s security with another long-term lease.

Husband: If you do start shopping the market and the landlord loses you, he or she will run into the same costs — in terms of paying commissions, making improvements, free rent, giving away moving allowances — to refill that space.

What options can tenants receive by recasting?

Canvasser: You usually receive rent relief immediately, beginning the day the new lease is signed. Leases in the Detroit area normally include annual escalations, so as the lease nears its term, payments are the highest. Immediately lowering rent by $3 or $4 a square foot can create big savings.

Husband: You also can build in expansion options, just as you would on any other lease you sign.

Can companies recast leases on their own?

Husband: You could, but brokers supply an understanding of the market and what tenants can ask for. The landlord understands that when you bring in a broker, you’re bringing in a market expert. The landlord understands that, if he or she does not negotiate in good faith, you will be out in the market looking at alternatives.

Canvasser: A broker serves as an intermediary to keep the discussions and negotiations on a cordial basis. The process — the lease abstract, reconfiguring space, finding inefficiencies — involves taking a look at space from a different angle than most business owners would. Brokers are involved in the transaction from the start to the finish, working with clients hand-in-hand to make sure everything is handled to their satisfaction.

Husband: Brokers can build in the most flexibility possible within the lease document itself. So economics are not the only consideration.

Canvasser: Most of the larger landlords prefer to deal with brokers because they know their tenants are serious. If the space works and the building works and you are happy, it’s an easy way to save time and effort instead of going out and looking for new space.

RAY HUSBAND is senior vice president in the Grubb & Ellis’s Office Group. Reach him at ray.husband@grubb-ellis.com or (248) 357-6561. DANIEL CANVASSER, CCIM, is an associate in Grubb & Ellis Company’s Detroit office. Reach him at (248) 350-8141 or daniel.canvasser@grubb-ellis.com.

Friday, 25 April 2008 20:00

Creative financing

In the Federal Reserve’s latest survey of senior loan officers, 80 percent of domestic banks tightened their lending on commercial loans from October 2007 through January 2008, the highest level ever.

“Given the capital crunch in the market today, options exist whereby companies can continue to grow their businesses through alternative financing of their real estate,” says Geoff Hill, senior vice president for Grubb & Ellis Company’s Industrial Group.

Smart Business asked Hill for more information about a few tools that are available in today’s market.

What current market dynamics make creative financing a viable option for purchasing corporate real estate?

The capital markets and banks in general are becoming more stringent with their lending policies. Most banks now require down payments of 25 percent to 40 percent.

Even though rates for Treasury bills are dropping, banks are increasing their spreads. A couple of years ago, the spread between Treasuries and what they were lending on was 185 to 225 basis points. Today, it’s 250 to 300-plus points, meaning that when Treasuries are at 4.75 percent, the loans are around 7.75 percent.

Finally, some banks are putting a minimum on loan rates, varying from bank to bank, with 6 percent to 6.5 percent as a floor.

Please provide an overview and definitions of some of the available options.

Some alternatives to traditional bank financing are sale/leasebacks, Small Business Administration (SBA) loans and industrial revenue bonds (IRBs).

A sale/leaseback is an arrangement whereby one party sells a property to a buyer and the buyer immediately leases the property back to the seller. Sale/leasebacks most commonly occur when the owner is trying to pull equity out of a building. Most sale/leasebacks will have a 10-year to 20-year leaseback term, to be reinvested back into its core business.

With an SBA loan, a borrower can finance up to 90 percent of the purchase price of a building. The SBA will lend up to 40 percent of the project cost in a subordinate position to a bank or finance company, which will typically lend 50 percent in the primary position. Thus, the borrower puts down just 10 percent in equity. The SBA portion cannot exceed $4 million if you’re a manufacturer or $2 million if you’re not a manufacturer. The SBA portion, which can also be used to purchase new equipment, is loaned at a 20-year fixed rate; the bank portion is 15 years to 20 years rolling every five or 10 years, varying from bank to bank. Upfront fees for an SBA loan are a little higher, but the interest rate is lower than conventional financing.

IRBs can only be purchased by manufacturing companies. They are typically tied to short-term borrowing rates, about 25 to 50 basis points above the LIBOR (London Interbank Offered Rate), which is much lower than any other type of financing. Those rates adjust on a monthly basis. The program is administered through a bank, which sells the bonds, requiring an irrevocable letter of credit from the borrower. Typically, the cost for a letter of credit is a percentage of the loan amount.

Under what circumstances might a buyer consider each of the aforementioned alternatives?

For an SBA loan, generally speaking, the target size of a business starts at the level of $1 million in annual revenue and ends at companies pushing $100 million a year. Incidentally, the SBA portion of your loan is assumable to give you some flexibility.

A sale/leaseback is also a good tool for medium-sized to Fortune 500 corporations that are finding it tougher to find traditional lenders. For instance, one of our clients was looking to consolidate engineering facilities now located all over the country into one building because it had entered into bankruptcy proceedings. After agreeable terms were worked out, an investor bought that building and our client signed a long-term lease. The investor got the return he was looking for and the client didn’t have to tie up working capital, so the situation worked out well for everybody.

IRBs only make sense if the total project cost is more than $2 million, because upfront fees may be in the neighborhood of $100,000. If you purchase IRBs, you are required to put 15 percent of the total project cost back into the building and/or by purchasing new equipment. The only other restriction — which rules out a lot of tier-one suppliers and original equipment manufacturers — is a limit of $10 million on capital expenditures over two years. Medium-sized manufacturing companies — like a tier-two supplier — are ideally suited for IRBs, as long as their total revenue is not more than $100 million per year.

GEOFF HILL, SIOR, CCIM, is senior vice president for Grubb & Ellis Company’s Industrial Group. Reach him at (248) 350-1492 or geoff.hill@grubb-ellis.com.

Friday, 25 April 2008 20:00

In your best interest

Lee Wagner doesn’t mince words. “Most corporate managers simply don’t have the time or resources to adequately deal with real estate issues,” says Wagner, Senior Vice President in Grubb & Ellis Co.’s Dallas office.

Real estate brokers who specialize in tenant representation can eliminate many of the hassles in site selection and negotiation, save you a substantial amount of time, prevent potentially disastrous missteps, and possibly cut much of your real estate expense.

“Tenant representatives can find a first-time office space, renew an existing space, or relocate within the same building or into another building,” Wagner says. “They can also move you to a completely different submarket altogether.”

Smart Business talked to Wagner about what you should expect from a bona fide tenant representative.

What are the main reasons that a company looking for a commercial lease should employ a tenant representative?

Primarily, a tenant rep will have allegiance only to you, like a lawyer who has a fiduciary responsibility to his client. He or she will give vendors and real estate solicitors a single point of contact to act on your behalf.

A tenant rep will also balance the representation of parties. Nine times out of 10, the landlord will have representation. Why would you want to go into negotiations without representation, knowing that the other side will be represented?

Finally, your business, most likely, is not real estate. That responsibility can be outsourced to someone who can oversee the process and make sure it runs smoothly. Tenant reps know changes in laws, ownerships, building availability and lease documents. This is their life — every single day.

Do companies normally have to sign contracts with tenant reps?

There should be a contract because it helps to understand the roles and responsibility of the tenant and the broker. When you’ve got seven brokers calling on a building that they think will be a good fit, this leads to chaos in the marketplace. The contract will outline responsibilities of each party.

Any valid contract will need to have a commencement date and an expiration date. The term should coincide with the objectives that the rep or broker is trying to accomplish on behalf of the tenant.

For companies with multiple sites, sometimes the contract becomes a corporate services contract.

What services can you expect from a good tenant rep?

The two big things are market knowledge and lease negotiations. They know of opportunities in the marketplace that may not be public knowledge. They’re constantly looking for spaces and new opportunities that are coming to the market. You wouldn’t have access to that knowledge if you tried to do it solo.

Typically, tenant reps/brokers will challenge clients from day one to make sure that they are getting exactly what they need. They want to make sure that tenants are right-sized — with some space, perhaps, reserved for a little bit of future growth.

Good tenant reps also might be able to create a bidding war among landlords for your business. Then, during lease negotiations, they can identify provisions that could cost you money. Does the lease have those things in it that a true tenant rep would typically fight for? Does the lease include sublease rights? Does it allow for expansion or contraction provisions? Does it reflect a current operating base year? Does it include liability issues?

Tenant reps often establish a longer-term relationship with their clients. Then, once the lease is signed, they can serve as a buffer between the client and the landlord. Plus, if the economy starts to soften up and a company needs to contract its business, a tenant rep can market the unused or unwanted space. If a company needs to expand, then a rep can help do that.

What other ways can a tenant rep save a company money or headaches?

A tenant rep will always encourage a client to start the process earlier than expected. When time is on your side, you have leverage. On the other hand, when you’re under the gun, before you know it, the process of finding the right location becomes extremely difficult. It becomes rushed.

It’s very important to have people on your side of the table with timelines — especially with today’s economy. And having time to decide before you act also helps ensure that you don’t make any stupid mistakes.

Real estate decisions are big decisions. Real estate costs are typically the second-largest line-item expense and normally equate to 25 percent or more of a corporation’s overall budget. Mistakes, then, are extremely costly.

LEE WAGNER is Senior Vice President in the Dallas office of Grubb & Ellis Co. Reach him at lee.wagner@grubb-ellis.com or (972) 450-3284.

Sunday, 24 February 2008 19:00

Hidden opportunities

Commercial property lessees who want to beg off their existing lease have an alternative that can result in minimizing their financial loss: sub-leasing. It’s an alternative that creates a win-win situation for both the lessee and the sublessee.

“The hidden opportunity for the tenant is to get out of an existing lease with a minimum loss,” says Sam L. Hocker, Senior Vice President of the Office Services Group in the Dallas Office of Grubb & Ellis Co. “The hidden opportunity for the landlord is a possible chance to make a more competitive transaction for a new tenant. And the hidden opportunity for the new sublessee is obtaining space at a discount price.”

Smart Business talked with Hocker about the ins and outs of subleasing in the Dallas area.

What are some of the market conditions that have led to the increase in sublease inventory?

Available commercial subleasing space began to trend upward in 2005, when the inventory was about 3.5 million square feet. By the end of the fourth quarter, 2007, about 4.9 million square feet were available.

It’s hard to pinpoint one single reason. Not all availability is because of negative business conditions. Some space has become available because companies outgrow their space. Mergers and acquisitions often end up in either abandonment or consolidation of space. And some companies — like financial companies caught up in last year’s credit crisis — simply downsize.

The economy — which is apparently slowing down — is another reason for more subleasing space becoming available.

Where do opportunities lie for tenants?

We used to negotiate over who was going to get the profit on any sublease that occurred, but it’s hardly a profitable venture anymore. I haven’t seen a profit made on a sublease in 25 years.

So the point to subleasing is more to minimize a loss within a reasonable period of time. If you need to sublease some of the space you’re currently leasing, you probably have to sublease it for much less than what you’re paying to lease it. But losing 25 percent of your property investment is better than losing 100 percent.

If the term is less than five years, then the discount is significant because of the inherent expense associated with a move. If the remaining term is less than three years, the space is often unmarketable, so your chances of recovery are not very good. It’s like an icicle. The longer it takes to sublease a space, the less you have to offer.

Where do opportunities lie for owners/landlords?

If the existing tenant hasn’t been successful subleasing, it may be willing to buy out the lease for 50 to 75 percent of its remaining obligation. That transaction could result in a substantial amount of ready cash for the landlord.

Subsequently, the landlord could give a possible new tenant an extended term. Discount shoppers don’t mind moving around at the end of subleases; that’s one of their operational efficiencies, if they get the properties at cheap enough prices.

So the new deal would lower the landlord’s cash burden on the front end, and any other landlord would have to reach into his own pocket for enough money to compete for the new tenant. The landlord ultimately receives money contributed from the departing tenant — plus an extended term on the new tenant’s lease.

How does the situation become win-winwin for all parties involved in a deal?

As I said, the opportunity for a landlord is to be more competitive to secure a new tenant. His creditworthy tenant is willing to buy out the existing lease so the landlord can then make a new transaction. Usually, the new lease is for a term that extends beyond that of the original lease. Another advantage is that the landlord has enough ready cash to be highly competitive for new tenants. If another landlord without sublease space is competing for the business, he may not have the ready cash to build out his available space.

Meanwhile, with a buyout or by sub-leasing, the existing tenant gets out of its rent obligation for substantially less than what it would normally owe the landlord.

And the tenant that’s coming into the property would get a discount price, a favorable build-out and the extended term that it wouldn’t get in a normal lease or sublease.

SAM L. HOCKER, CCIM, SIOR, is Senior Vice President of the Office Services Group in the Dallas Office of Grubb & Ellis Co. Reach him at (972) 450-3322 or Sam.Hocker@grubb-ellis.com.

Tuesday, 29 January 2008 19:00

It makes dollars and sense

Health care insurance premiums continue an alarming trend upward. What’s a conscientious employer to do?

“Health care costs continue to spiral out of control for many employers,” says Michael J. Stief, a partner at Jackson Lewis LLP. “Many employees who work for smaller companies don’t have company-paid health care at all. Other employers are slashing health care benefits.”

A report titled “Guide to Health Care Cost Control, 2008” by the Institute of Management and Administration says that employers today pay 59 percent more and employees contribute 79 percent more than five years ago for employer-sponsored health plans. In 2002, employers paid an average of $4,342 in medical costs for employees; in 2007, those costs jumped to $6,924.

Smart Business talked to Stief about corporate alternatives to increasing health care premiums, including the adoption of some employee wellness programs.

What are wellness programs designed to do?

Workplace wellness programs are designed to create a culture of health in the workplace. They often offer incentives for employees who adopt healthier lifestyles, such as discounts on group health premiums, and penalize those employees who do not.

This is somewhat of a new phenomenon, and it’s really because employers are faced with a health care system that’s broken. But there’s also a hidden benefit: a healthier work force lives longer and is happier. Employee wellness programs are a good idea. They work. But programs should be created only after employers really think through just how much they want to dictate the lifestyle choices that their employees make.

How much can a wellness program affect a company’s health insurance premiums?

It depends on a lot of things, like the census of its work force and how aggressive the wellness program is. The proof is in the pudding. If you reduce health care costs over the course of a year, that will play a big role in your premiums being lowered.

How can wellness programs become controversial and even illegal?

Employers can get very aggressive. For instance, some have created policies where people cannot use tobacco products at any time and still be employed at the company. This is different than not smoking while at work; this is not smoking at all — and that is a very controversial policy.

A good number of states have lifestyle-rights laws that protect employees’ right to smoke when they’re not at work. Pennsylvania is not one of those states. If an employer in Pennsylvania so chooses, it can adopt that type of policy. However, that’s a very important step that must be well thought out. Obviously, there are employee relations implications. Will such a policy affect morale? Will it lead to a union-organizing drive among workers? Could it affect the company’s ability to recruit or keep top talent?

The depth of these questions shows you the radical steps that employers may be willing to take in order to cope with this health care crisis. Dictating off-duty lifestyle activities is the exception rather than the rule right now. But if costs continue to spiral, you may see more employers adopting this kind of policy.

Are those corporate lifestyle policies legal?

If you are in a state that has no lifestyle discrimination laws, then an employer that adopts a smoke-free work force would most likely have the legal right to terminate any employee that uses tobacco products at any time. The decision to adopt such a strict policy is something you need to go over with labor and employment counsel because there may be legal issues under the national Americans With Disabilities Act or under your state’s disability-discrimination law or under a state lifestyle-discrimination law.

Are there other ways for employers to avoid rising health care costs other than adopting strict wellness programs?

Many employers today try to shop around every time their insurance goes up — which is just about every year — to get the best rate they can. However, to call that a negotiation with insurance companies is a misnomer because the insurance companies have most of the power, especially when smaller employers are involved.

Where is the whole trend toward dictating wellness programs and even off-duty lifestyle activities going?

Employers are faced with a real Hobson’s choice when it comes to spiraling health care costs. It seems like our system is broken and no remedy is on the horizon, and employers are doing what they think is in the best interests of the entire work force. It goes without saying that people who live unhealthy lifestyles, including those who smoke, use their health insurance more. Some would say it’s unfair that healthy employees have to share in the same costs as unhealthy employees.

With the 2008 U.S. presidential elections on the horizon, some politicians are talking about the need to correct the health care problem. However, it doesn’t appear that they have any substantive solutions, and the debate whether this country should go to socialized medicine is very controversial.

MICHAEL J. STIEF is a partner at Jackson Lewis LLP. Reach him at (412) 232-0138 or stiefm@jacksonlewis.com.