What you should know before you put your property on the market

You may no longer notice the stains on the ceiling tiles from the roof leak in your warehouse five years ago, but it’s likely they would catch the eye of a prospective buyer, says George J. Pofok, CCIM, SIOR, senior vice president at Cushman & Wakefield/CRESCO Real Estate.

“It would instantly put a negative thought in that person’s mind about the property and the potential expense they will likely incur down the road,” Pofok says. “First impressions go a long way when you’re trying to make a sale.”

The act of preparing a building for sale and finding the right real estate professional to help you market the property takes both time and attention to detail.

“You need to engage a real estate professional to help market your property,” Pofok says. “At that point, it’s the adviser’s duty and job to know every detail of the property and assemble that information into a neat, clean property package that presents the building with the best possible image.”

Smart Business spoke with Pofok about how to prepare your building for sale and find the right real estate professional to help you through the process.

Where should you get started preparing your building for sale?

The first step when putting a building on the market for sale is to reach out to a real estate agent that principally specializes in your industry (i.e office/industrial or retail) or geographic area of business. Obtain the adviser’s thoughts on how to prepare your building to be put on the market so that you can stage it appropriately or make certain improvements that will maximize the value of the real estate asset.

Solicit recommendations on what improvements should be made prior to going to market. Not all improvements will translate to an increase in value of the asset, so an adviser may tell you to not do something because you won’t see a return on the investment. Improvements could include landscape cleanup, painting warehouse walls white, lighting upgrades, office cleanup or replacing damaged/stained ceiling tiles. It may be from an old leak five years ago that has since been repaired, but the prospective buyer is only going to see the stains, so you want to get that problem resolved. If you have scrap or trash compactors outside, make sure those areas are clean of debris. When people have an impression of cleanliness, they will think you’ve taken care of your property.

How will the right real estate adviser help you market the property?

Buyers are far more sophisticated than they have ever been before. They are on the internet searching for information and will know a great deal about the property before they call you. The ability to put accurate information in their hands or in the various databases they use is critical. Buyers may pull up a property brochure and be looking for a warehouse with specific ceiling heights, a certain number of truck docks or drive-in doors. The buyer may also have specific power requirements. If you have inaccurate information in those various databases, your property may be overlooked or you’ll be ruled out without even knowing it. Real estate professionals do this on a daily basis, so it’s important to listen to their advice. They won’t tell you how to make your widgets, but they do know real estate. It’s also helpful to work with a team. People want information right away and when you work with a team, there is more than one person who can answer a question, forward information or show you a property.

Is it OK to show the property during normal business hours?

Most companies understand that folks need to operate their businesses. There are often times when watching another company’s process might be beneficial and helpful as potential buyers look at how they would lay out a facility. When I look at the number of deals that I’ve completed on showings after 5 o’clock or on weekends, I don’t know that I’ve actually made one. If people are interested in a property, they’ll typically come during normal business hours.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Why introspection is often a crucial piece in solving a real estate need

Most companies spend very little time thinking about real estate until it is too late, but rather are intently focused on growing their business and reaching new customers. So when the time comes to consider whether your current space can meet your company’s needs both now and in the future, it’s a good idea to get help early in the process, says Joseph V. Barna, SIOR, a Principal at Cushman & Wakefield/CRESCO Real Estate.

“Let’s say you’re at the near end of your building lease and you realize you’ve outgrown your space,” Barna says. “You call a real estate broker and say, ‘We’ve outgrown our office and we need a new space. Here’s what we need. Go find it.’”

It seems simple enough. But a more introspective approach that takes into account where your company is at, the new challenges you are facing to remain competitive in your industry and the attributes of the ideal space to help you meet those challenges can make a significant difference.

“It’s important to step back and look at all the pieces and then evaluate what the best decision would be for your team and your company,” Barna says.

Smart Business spoke with Barna about some keys to making a more effective real estate decision.

What’s a good first step for a company with real estate concerns?

You have to make sure you have the right team to do the best job on whatever the assignment is going to be. But the key is to get inside that assignment before you bring in the different vendors with individual interests. For example, in order to maximize value, it’s imperative to bring in an experienced consultant before you go out and engage a construction company or an architect. Quite simply, you don’t know what you’re designing yet.

You need to work with your consultant to figure out what your business is, where it’s going and how to get there.

A good consultant can help you back up, get inside your head and find out what’s driving your decision to consider a change. Another thing that you may not understand if you’re unfamiliar with the real estate process is the lead time that is needed to successfully complete a project. If you want to do what’s best for your business, preplanning well in advance is a must.

How do you find the right partner for your company’s needs?

It’s often good to work with a company that is not affiliated with a specific product or aspect of the project, an unbiased third party that can explore all alternatives and share honest opinions about what you need. You want a team with expertise and access to what you need, but one that you trust will make the best recommendation for your business.

You want a consultant who is willing to ask hard questions and build credibility that he or she understands your goals and is willing to do what is necessary to move you toward that desired outcome. The consultant’s expertise may get you to an idea that you had never even thought of before, but that can help you exceed your expectations.

What are some ways that real estate expertise can guide you to a better decision?

For example, you currently occupy 15,000 square feet and feel that you’re out of room to accommodate new hires and need to relocate to a larger space. But an expert might look at what you have and present an alternative manner in which to reconfigure your existing space to meet your needs, improve productivity and employee moral, as well as avoid the cost of a move.

Or you could be in a warehouse and have storage concerns. But you didn’t know about sophisticated racking systems and processes that can enable you to do more with less.

You’re focused on your business and it may be that you simply don’t realize the options at your disposal. In summary, an experienced consultant can enable you to make a more informed decision by identifying solutions you might never know existed.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

What to consider when deciding whether to own or lease your space

A number of strategic decisions should be considered when making the decision to own or lease facilities for your company, says William D. Saltzman, SIOR, CCIM, executive vice president and director of office services at Cushman & Wakefield/CRESCO Real Estate.

“Needless to say, it’s an important decision and a complicated process,” Saltzman says. “The key to making a good decision is to have solid information that is based upon thoughtful, credible assumptions. The more successfully you’re able to anticipate your company’s future needs, the better off you’ll be.”

Smart Business spoke with Saltzman about key considerations when making the decision to lease or purchase commercial property for your business.

What are the pros and cons of owning real estate versus entering a lease agreement?

Leasing provides flexibility. Generally, with leased facilities, business owners can be more nimble. They are able to expand or contract based upon changing needs, and can do so more quickly. The risks associated with ownership are eliminated; for example, the possibility that you may need to sell your property during a downturn in the market. In the event you plan to sell your business, the prospective purchaser may have little interest in owning the real estate.

In leasing, business owners typically avoid the headaches of maintenance, repairs and valuation risk and are better able to concentrate on core business activities without being distracted by the concerns of real estate ownership. Conversely, there are significant advantages to owning the real estate your company occupies, including valuable financial and tax benefits. You can modify the premises for your specific requirements and you’re making improvements in your own asset as opposed to an investment that benefits the property owner. There is also a certain mystique that can be associated with property ownership. Investment in real property conveys financial stability, success and greater control of your company’s future. As a property owner, you have greater influence on the compatibility of adjacent businesses, which is something that would be difficult to accomplish as a tenant.

What’s the key to making strong assumptions about your company’s future?

Take the time to build realistic financial models that are based on thoughtful, informed projections. Adjustment of just a few percentage points in these forecasts can significantly impact the outcome.

Within your business, look at the ways in which your space requirements will change over time. What is the cost and availability of capital today? What are the projected returns from additional investment in your business? If the right facility is available for acquisition at a fair price today and your preference is to own the property that your company occupies, it may be prudent to act now.

You also must consider the residual value of the asset, if you own it. What’s the estimated future value if you hold onto it for X number of years? The analysis should consider total occupancy cost, which includes line items for rent, operating expenses, utility costs and tenant-funded improvements. Evaluate it on a net present value basis to come up with your true occupancy cost over that same period of time. On a purchase, you’re going to look at the debt service, the annual operating expenses and the opportunity cost of that equity that you’re putting into the acquisition. Look at the period of time during which you own the building and assume what the equity reversion is or what the sales price would be at the end of the holding period. What assumptions are you making to reach your conclusion? And what do the numbers look like when you compare leasing the space to owning it?

What is the difference between a triple net lease and a gross lease?

In a triple net lease, 100 percent of the expenses are borne by the tenant, including responsibility for maintenance, repairs, insurance and taxes. In a gross lease, by contrast, the rent paid by the tenant typically includes an allocation for expenses and taxes. In this case, the increased cost of occupancy over the term of lease is limited to incremental adjustments that the landlord passes on to the tenant over that base allocation.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Take the time to understand the language in your lease before you sign it

Due diligence is a crucial step for any business that seeks to make a smooth transition into newly leased space, says Simon Caplan, SIOR, a partner at Cushman & Wakefield/CRESCO Real Estate.

“When you sign a long-term lease, you are now married and committed to that space and the landlord,” Caplan says.

“You need a strong lease agreement to protect both parties and to ensure that everyone understands how certain responsibilities will be managed. The manner in which this process is conducted can go a long way toward achieving this goal.”

Smart Business spoke with Caplan about subtle, but significant issues you should understand before finalizing your next lease.

What key components are included in most building leases?

The most basic element of the lease is the description of the premises, which should include the size; the location in the building if there are multiple tenants; a description of the common area(s); the amount of parking that you receive for your employees, clients who visit your facility and trucks; and the common area factor of the building, if applicable.

It should also be clear who is responsible for the build-out, or any work that is required to convert the space to fit your needs. Besides rent, other potential add-ons to the lease payments could be real estate taxes, building insurance, common area maintenance and cleaning fees, which all should be laid out.

Make sure that all dates are understood such as lease start, rent start, termination, option notice, payments due, etc. These are all common items to include when leasing space and should not be overlooked.

What are some leasing issues that companies commonly forget to address?

One common omission is an adequate description of the condition of the premises that the landlord will be providing for the tenant.

This would include things like new walls, paint, carpet, cleaning, repairs, etc., to differentiate from ‘as-is condition.’
Understand the operating expenses of the property and how they are or may be passed on to the tenant(s). In most leases, the interior maintenance is the responsibility of the tenant while the landlord is responsible for the exterior, structure, roof, parking lot, etc.

Typically the cost of landlord maintenance and repairs are passed through to the tenant, while the landlord is financially responsible for replacement of capital expenses such as a new roof or parking lot.

Sometimes the landlord is permitted to pass through amortized portions of capital expenses.

A good lease provides detail so that both parties understand who is responsible to make what repairs and also who is ultimately responsible to pay for said repairs.

Insure the ability to get and install high-speed Internet, satellite dishes and other high-tech communications systems in the premises and through the common areas, roof, etc.

Understand the damage and destruction clause regarding timing and responsibility if there is a significant fire, flood or other occurrence at the property. The best advice is to include language in the lease that both parties agree to in order to prevent any misunderstandings should the worst occur.

How can you protect against an unresponsive landlord?

If you are constantly having roof leaks and the landlord doesn’t schedule a contractor to fix the leak(s), after a designated period of time, you, the tenant, should be able to call a roofer and have it fixed. The same applies for any other major maintenance or repair issue. A self-help clause gives you the legal ability to potentially apply the cost towards rent or another financial obligation to the landlord. This can only be done if No. 1, the landlord is unresponsive after repeated notifications to address a problem and No. 2, it’s written in the lease that you have the right to do this.

It’s important before you sign your lease that you determine whether your potential landlord is capable of performing all of its obligations. You can be proactive and work with a quality real estate broker who can pass on the experiences of other tenants with different landlords and give you a sense as to whether you might have reason to be concerned before you sign your lease.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Take time to identify problems before you close on a real estate purchase

Due diligence is an essential component to any real estate purchase, but Alec Pacella says you might be surprised at how little some people know about a building before they sign the papers to buy it.

“I’ve sold plenty of property where the owner never looked at it,” says Pacella, managing partner and senior vice president at NAI Daus. “To me, that’s unfathomable that somebody could buy a property without seeing it.”

Experts such as structural engineers, land surveyors and environmental assessment professionals are typically brought in to evaluate a facility. But they are looking at the space with a very specific purpose in mind.

“You’re the owner and these people aren’t looking at your building with the same eyes that you are,” Pacella says. “If I’m buying a building, I’ll have the experts make their assessment, but I want to see it with my own eyes. That’s No. 1.”

Smart Business spoke with Pacella about ways that due diligence can reduce your risk when purchasing real estate.

What are some common mistakes that business owners make when purchasing real estate?

There are two parts to your due diligence efforts. One is what you pay for and the other is what you do yourself. The part you pay for is an area that people often overlook. You’re a business owner and you’ve already agreed to pay $500,000 for a building.

Now you’re expected to dole out more cash for a building inspector, a Phase 1 environmental study, a survey of the property.

If you’re in a hurry to complete the deal and get moved in, you might make the assumption that everything is OK and that any problems would have already been brought to light. This can be a dangerous and costly assumption made in a misguided effort to control costs. The effort you make to identify problems with the heating and cooling system or the structural integrity of the building before you buy it can ultimately save you money.

As for what you can do yourself, do a complete visual inspection that includes every aspect of the space. Inspect storage areas, the basement, the roof and the stairwells. Take note of anything that doesn’t seem right.

You should also visit the property at different times. Most property visits in business take place in the middle of the day. Make time to stop by early in the morning or in the evening or even on the weekend. The complexion of the property could be very different. If it’s your building, you want to know what’s happening on or around your property, whether you’re working or not.

How costly is it to not be thorough in your due diligence?

It can be crippling. If there is an easement across your property that you didn’t know about, you might be surprised to look out at your parking lot one day and find several trucks that have arrived to service an area that is only accessible through that easement.

Perhaps your building is located next to a site that was once a gas station and there are monitoring wells that require periodic inspection. Issues such as these can have a long-term impact on your business. In some cases, you can work around the issue. But it’s a lot easier to manage a potential disruption when you can plan for it.

Another useful step that doesn’t cost you anything is to check in with officials of the city where you’re looking to buy a building. Talk to building or zoning inspectors or the local planning commission. Often, they’ll know about the history of your property and anything that might impact it. This could be something from the past or a future project.

If there are plans to put in new sidewalks or a new sewer system, or to rezone a parcel adjacent to your property, that would be useful information to know. In some cases, it might cost you a little more to discover important information. But if it helps you avoid a more expensive headache down the road, it’s money well spent.

Insights Real Estate is brought to you by NAI Daus

The commercial real estate market in Cleveland is ripe with opportunity

Downtown Cleveland’s real estate market is having a great year.

Major employers like Spero-Smith Investment Advisers and Fox Sports Ohio announced they would move downtown from their suburban locations and Benesch became the first announced office tenant for nuCLEus, a planned $300 million mixed-use development in the Gateway District, according to a report from Downtown Cleveland Alliance.

Demand for downtown Class A office space is outpacing the demand for suburban locations and the grand opening of Heinen’s in the historic Cleveland Trust Rotunda led to an influx of 15 downtown retail commitments in the year’s first quarter, per the report.

The confluence of growing confidence in the economy and an understanding that at some point, the Federal Reserve will begin raising interest rates is leading to strength in the real estate market, says Rico A. Pietro, SIOR, a Principal at Cushman & Wakefield Cleveland.

“People likely have never seen a healthier market,” Pietro says.

Smart Business spoke with Pietro about the commercial real estate market and what you should be thinking about as you decide how and where to invest your money.

What is the mindset of prospective commercial real estate investors in today’s economy?

Flexibility is very important in today’s market, whether it’s the terms of the agreement for the space or the space itself. Things can change so quickly in the current economy that business owners don’t want to be locked into anything that could put their company in a restrictive situation. So they are evaluating lease vs. buy options and attempting to make a decision that best fits their needs.

You want to be comfortable with the choice you make and confident that you’ve considered all the alternatives that are available to you. If you’re a startup company, consider leasing space to help you maintain that valuable flexibility. Use your cash flow to reinvest in your company so you can get to a point where you have a good sense for what your company’s space needs will be. At that point, you can more confidently commit to a property on a long-term basis.

The biggest mistake you can make is to buy a property that doesn’t fit your long-term goals. You get a big win by securing a new customer, but then discover you’ll need at least 50 new employees to manage all the business from that account. Unfortunately, you just committed to a building that doesn’t have that much space and now you’re stuck. Whether you’re a startup or an established company, you need to keep the future in mind when making real estate investments.

What are the advantages of leasing vs. buying?

Leasing is less of an economic commitment and as the market does change, you ride the wave. If it’s a down market, you’ll be rewarded with a more affordable occupancy cost. And in the event you sell your company, real estate space that is leased is not a contributing factor in the valuation of your company.

When you buy property, you’re creating value both for the property and for your business. Buying also gives you consistency when it comes to your annual occupancy costs. And if the market is doing extremely well, your mortgage payment remains the same.

What other real estate options exist for today’s business owner?

Many business owners find that they are now using less space in their current location. Employers are moving to a more collaborative concept that combined with the growth of technology and the resulting reduction in hardware necessary to support that technology has freed up space for other uses. A willing business owner could take that space and turn it into a revenue source by re-leasing it to other tenants.

Another option is to take the extra space and use it to bolster your own company’s culture. It could be an area where leaders and employees can brainstorm about projects they are working on. Or you could create a space where employees can get away from their work for a bit to recharge their batteries. If that increases productivity, that can provide a boost to the bottom line as well, even if it’s a little more difficult to measure.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

A few key points to consider before you set out to remake your workspace

Architects can play a key role in helping your company create a workspace that matches your vision of how you want the company to operate.

“An architect can sit down and interview your key people and gain an understanding of how everyone works in your business,” says Alec Pacella, managing partner and senior vice president at NAI Daus.

“He or she can understand the critical components of your business and see what parts of the office need to be more collaborative and where you need to have more privacy.”

Collaboration and open space are more popular than ever in the working world, but Pacella says too much of anything is often not a good thing.

“You need to be able to draw a line between having open space and having a total free-for-all,” Pacella says.

Smart Business spoke with Pacella about how to develop a workspace that fits the needs of your business.

What is the biggest change in today’s typical workspace?

Companies are much more efficient in the way that they use space and that amounts to less square footage.

Some of the factors pushing this trend are the increase in shared working spaces and the rise in the number of people working from home, as well as the diminished reliance on paper files.

The raised floors that would cover up all the cables and wires don’t exist anymore. Younger employees want to be more collaborative and companies are adapting to create workspaces that facilitate that kind of working environment with the goal of boosting productivity.

What factors needs to be considered if you want to remake your space?

You need to take a balanced approach. Glass walls and doors have become very popular, but you can take it too far and leave everyone feeling like they are in a fishbowl. There are ways to temper it with frosted glass or transparent designs that allow you to see through it without the glass being crystal clear. This is where getting an architect involved can be very helpful in developing your plan.

Another consideration is IT. Think about where you’ll need charging stations to allow visitors to your office to plug in their electronic devices. You also need to examine the space to determine where wireless hotspots are needed and where potential Wi-Fi dead zones might exist.

These may not be as easy to identify as you think. There could be pipes or metal beams behind a wall that affect wireless connectivity. You can buy a repeater to boost the signal, but you’ll want to know about those kinds of issues before you run into problems.

What are the pros and cons of transforming your existing space?

Many business owners think it’s easier to just start with a blank slate. But you don’t want to just abandon a space that has served you well for a period of time without giving it some thought. It’s often more cost-effective to reconstruct an existing space, but there are factors to consider.

One issue is that you’ll have to live through the reconstruction, which can be distracting to your employees. In some cases, however, it doesn’t take a complete overhaul to create a fresh working environment. Furniture can often help you achieve what you’re looking for without having to remove any walls. Architects can usually connect you to reputable furniture vendors that can help you find what you need.

If you want to make a bigger change that transforms your culture, you probably do want to look for a completely new space where you can start with that blank slate. Just be sure you keep in mind the needs of your employees and what they’ll need to most effectively do their jobs.

Does less space mean less cost for real estate?

Business owners think that because they are going from 8,000 square feet to 6,000 square feet, they’ll save money. That might be true in terms of rent.

But if you take that money you’re saving in rent and use it to create a cafe or a conference room with multiple flat-panel monitors and comfortable seating areas, your real estate costs could easily stay the same.

Insights Real Estate is brought to you by NAI Daus

Real estate professionals provide valuable tools to support growth

Commercial real estate transactions require a commitment of time and effort that some business owners are hesitant to make, says Eliot Kijewski, SIOR, senior vice president at CRESCO Real Estate.

“There are so many little things that you need to think about that are easy to forget,” Kijewski says. “You may have your heart set on one space and go all the way down the line and find out there are three things that you didn’t think about that need to be changed in the building that could cost you hundreds of thousands of dollars.”

Kijewski says real estate advisers are often called in by business owners at the 11th hour to rescue a real estate transaction gone wrong.

“We made a mistake and we need your help,” Kijewski says. “Sometimes it’s at the end of a lease negotiation. Other times, it’s someone who was trying to do a deal on their own and is overwhelmed by the process. Your business is whatever your business is. For a real estate professional, our business is real estate.”

Smart Business spoke with Kijewski about how to select the right real estate professional for your company’s needs.

What is the biggest mistake business owners make when looking for a real estate adviser?

The biggest mistake is to not narrow down your search to find someone in a specialized area of service. It might be tempting to call on a friend or contact you have in the business, but that person may not have the right expertise or qualifications to provide what your company needs.

Are you an industrial company that manufactures a product? Are you a call center? Are you a retail store? You’re going to want someone who has worked in your area of business and is familiar with its unique characteristics so you can identify a space that fits your needs.

Let’s say you’re opening a retail store. You want to find the right building or piece of land with the right traffic count and location to support the business. But there are so many more variables that real estate brokers deal with other than just finding the right site.

What are some specific areas in which a real estate adviser can help?

You might have an industrial business that needs a certain type of sprinkler system and the adviser can direct you toward the type of building that can handle it. Maybe your company requires more power than a traditional warehousing business. Or you might have more of an office environment and need a location that is close to a bus line or has the capacity to provide day care services for employees.

In addition, there are some very simple things that might slip through the cracks. How many restrooms do you need? What is the situation for handicap accessibility? How much availability is there to expand parking in the future?

Here’s another scenario: You sign a lease for $5,000 a month for five years. Does that include real estate taxes? Business insurance? Property insurance? Utilities? Cleaning? These are only a few examples of small details that can leave you in a heap of trouble if left unaddressed during your real estate search.

How should you prepare when you meet with a real estate adviser?

Have a good plan in place that details your future. How long do you want to stay in the building? Are you buying or leasing? Are you selling or renting? What do you intend to do with the space? Is it only office? Is it manufacturing? Will there ever be a need for warehousing in that space? Think about what you’ll need today as well as in the future.

You also want a real estate professional who has experience and can help you develop a good exit strategy. What are your plans at the end of your term? Do you have options in your lease?

If it’s a family business, do you have a plan in place if the next generation doesn’t want to continue the business? These are all important factors that need to be understood and ironed out. This process can be properly supported by a real estate professional.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

The art of the deal: Smart investors always have a plan for what’s next with their property

The best time to start thinking about your long-term plans for a piece of property is as soon as you buy it, if not before you even make the purchase, says Alec Pacella, managing partner and senior vice president at NAI Daus Property Management.

“Most investors don’t do this because it seems counterintuitive,” Pacella says. “You just bought a property, why would you want to think about selling it already? But this is not about doing a quick flip. You should have certain gates or periods of time that you have set up to say, ‘OK, I’m going to look at this asset in two years and again in five years and seven years.’ Have a plan in place upfront before you buy the asset.”

The benefits of being proactive are obvious: Few things in life or in business ever go exactly according to plan.

Smart Business spoke with Pacella about best practices to consider when evaluating the future of your property assets.

What’s the best way to approach the long-term plans of a property investment?
One of the keys to your approach is an understanding that managing the investment will likely be a fluid process. You can change your mind if the marketplace shifts and your original plans no longer make financial sense.

The key is to have that strategy or road map in place that keeps you connected to what’s happening. When you have a disciplined evaluation process, you know when a new interchange is being built a few miles down the highway from one of your assets that will likely become the next big development hub.

People often characterize real estate investors as being lucky, but it would be more accurate to say that luck is when preparation meets opportunity. The key to being a savvy investor is to recognize that opportunity and react appropriately.

If you’ve made a decision that you’ll sell when you have a chance to move up and acquire a bigger property, it becomes an easier decision to make when that opportunity arises. The acquisition is simply the next step toward that goal.

How does your investment base affect your thought process on property assets?

Let’s say you own a shopping center and you decide that in three years you’re going to take a look at where you’re at with the purchase. Any disposition decision that you make revolves around your investment base. If you bought the property for $1 million and believe that you could sell it today for $1.3 million, after you pay closing costs and taxes, you’re going to walk away with $1.2 million.

If you choose to do nothing at that point, you like the shopping center and its tenants and you decide to hold onto the property, you’ve re-bought it for $1.2 million. It doesn’t matter that you paid $1 million for it. That was three years ago. You’re foregoing that $1.2 million in your pocket and instead choosing to own the property for another three years. This is a critical thing for investors to try to understand.

Once you have that number, you can make an apples-to-apples comparison with other disposition options. What if you refinance it? What if you sell it outright? What if you sell it and buy another piece of real estate? What if you refinance and take the refinancing proceeds to buy another piece of real estate? If you take this option, you don’t have to worry about paying capital gains taxes.

What are the pros and cons of doing a trade?

You are able to push that tax consequence off to a future time period, which can be a good thing. You’re also getting into a new property if that’s what you’re looking for. One drawback, however, is that you get 180 days to close the deal from the IRS. That’s it. You also need to keep in mind that you’re postponing your tax consequence, not eliminating it. If you do multiple trades, that recapture keeps going up and can be massive when you finally decide to sell. ●

Insights Real Estate is brought to you by NAI Daus

Stay on top of your company’s key real estate needs and obligations

Business owners must balance numerous responsibilities to ensure their company is operating at peak efficiency. Real estate is an obligation that often falls on the priority list in favor of more pressing concerns. But when it’s put off for too long, it can cause problems, says Bill Saltzman, SIOR, CCIM, executive vice president and director of office services at Cushman & Wakefield/CRESCO Real Estate.

“When real estate is not your core business, it’s often viewed simply as a place to house your company,” he says. “But you need to craft a plan so that both you and the key leaders in your organization understand how real estate supports your core business.”

Smart Business spoke with Saltzman about managing your company’s real estate obligations.

Where do business leaders get themselves into trouble with real estate matters?

Today businesses seek to do more with fewer people, so down time is exceedingly rare. When it comes to real estate concerns, it is critical to allow enough time to plan and evaluate all of the important issues. As a tenant, you are well-advised to begin the review process with sufficient lead time. Otherwise, you run the risk of making this important decision in a vacuum or under duress. Leases often contain a holdover provision. Generally, upon lease expiration, the tenant may only remain in the premises on a month-to-month basis, and the rent can double. If you don’t go about making these decisions in a methodical and organized process, you can certainly run into trouble.

How do you develop a methodical process?

Make sure you know the commencement date and the expiration date of your lease. Develop a schedule as to when you’ll sit down with your internal team to evaluate your needs. In most companies, multiple parties need to weigh in on this process. For example, the CFO is looking at your space and lease terms from a financial perspective. Human resources may view real estate needs from the perspective of attraction and retention of employees. And the CEO may focus on corporate image and branding and will try to assess real property in the context of what the competition is doing.

It’s important to determine how decisions are made. Make sure there is consensus in terms of the role real estate plays within your organization and specific goals and objectives to be considered in any expansion or relocation. Once these basic discussions are completed, seek the advice of a professional to guide you and your team with issues such as timeline, budget, market conditions, economic incentives and needs analysis.

What motivates a business to evaluate its real estate options?

One approach is to break these options down into qualitative and quantitative factors. Qualitative is about attracting and retaining top talent. It’s the building’s proximity to a skilled workforce and the demographic you seek. You also look at amenities, signage, parking availability and cost, and access to public transportation as well as the benefits of the property itself.

Does it have required technology, acceptable views, food service, fitness or other amenities that are important to you? How well is the building maintained? Is it a comfortable place to do business? Quantitative is the value proposition. This is not just rent, but total occupancy cost, a combination of the rent, utility expenses, space utilization and efficiency, tenant improvements and other elements that make up what is paid on an annualized basis. What are you getting for your occupancy dollar?

How do you know if your occupancy cost is too high?

Total occupancy cost depends upon a number of factors including, but not limited to, the type of lease agreement between the parties, the effective rate (which is calculated after taking into account incentives, abatement etc.), escalation expense ‘pass-throughs’ and amortization of tenant improvements. With the assistance of a tenant advocate to provide you with detailed market information about trends and the occupancy cost of comparable properties, you should obtain a solid perspective of your cost on an ‘apples-to-apples’ NPV basis to determine whether or not you are paying too much.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate.