All Forum Posts by: Scott Patterson

Hi Kris, 

I am a broker from Los Angeles and I specialize in industrial properties. Sure it is a seller's market but this does not mean you skimp on any reporting you feel necessary. If I was representing a buyer and the seller balked at any reports, I would assume they were hiding something. 

I would NEVER advise a buyer to purchase an industrial property in California without a Phase I report. Remediation for any issues on a Phase I can quickly escalate upwards of $100k if there is contamination in the ground soil on the property. Additionally, if you are financing through a bank, they will always want to see a clean Phase I within the last 18 months or so. If the seller got the Phase I within the last couple years and the use of the property has not changed, you can roll the dice and assume it is still clean. 

As for the termite report, I would not be overly concerned unless you have reason to worry. I have walked in to warehouses where there was a pile of sawdust on the ground and it was raining down from the beams above. Obviously a red flag and would want to get a termite report in this case.

Your broker is correct about surveying. It is not necessary. 

Another thing that I always advise my buyers to be aware of is the condition of the roof. Roofs in Los Angeles seem to have about a 20 year lifespan before a $4-$5 per square foot replacement needs to occur. Depending on where in Los Angeles you are looking, roofs have different tendencies. San Fernando Valley gets very hot during the summer and then relatively cold during winter and even some summer nights. This causes expanding and contracting that has been a problem for some owners with the recent rains. All you would have to do is ask the seller about the condition of the roof. Ask about the last time they had it sealed or replaced. 

Given the current industrial market in Los Angeles, buyers be cautious. Many sub-markets are working with sub 1% vacancy which means if a building is on the market, there is probably a reason it hasn't sold. 

Best of luck to you and your company Kris! Buying can be a great option, especially with current SBA financing. I look forward to hearing how it all shakes out for you!

Scott

Hi Matt,

I'm a commercial broker in Southern California and I handle leases very often. If I were helping you find a spot and you came to me with these questions, I would first ask what type of business you are embarking on. The type of business dictates the type of property you will be in and the type of property you sign a lease for has different standards for tenant improvements, security deposit, minimum lease term, etc. 

I can answer for us locally here in So Cal but there may be different standards for landlords in Boise. Nonetheless:

"Are there any instances where the landlord should help with the cost of renovations?"

Absolutely yes. Depending on the local market, landlords typically offer certain concessions. Concessions could be: lower base rental rate, credit toward tenant improvements, or free or half rent for one or more months. The landlord will be more likely to make concessions if you sign a long lease term. For example: You may ask for a significant tenant improvement allowance or credit in lieu of free rent during the term. If you wanted a couple months of free rent, relatively low lease rate, and a relatively short term, expect to be paying for your own TIs. 

Having said all of that, I always say to my tenants that I represent: If our first offer gets accepted, we didn't ask for enough. Ask for the best case scenario for you and depending on how desperate the landlord is to have tenants, expect to end up somewhere in the middle.

Long story short... it depends. If the upgrades are truly upgrades, the landlord might prefer that you leave them. This is also relevant to the landlord paying for the tenant improvements because the landlord will be more likely to be willing to pay for your improvements if they add value to many tenants and they can keep the improvements after you move out. Any specific improvements will definitely need to be removed. 

Sounds like you're starting your business, so obviously you won't have a business track record. Here in Southern California we have 1% vacancy rates in many industrial markets so landlords can afford to be picky with their new tenants. I have had very qualified clients rejected because the landlord is waiting for somebody to come along with a ridiculous offer. 

Because your business will not initially be able to sustain the rent, expect the landlord to ask for a personal guarantee. Tell them your story and hopefully they will buy into your business and trust that you will be successful. The more you can give the landlord, the better. When you submit an offer to lease a space, build the case that you're going to be great tenants. 

At the end of the day, landlords only want 2 things:

1. No brain damage from their tenants.

2. Their rent checks.

Keep in mind that if you can prove to the landlord you're going to be a hassle free tenant that always pays rent, you're a dream tenant.

Hi Nathan,

I have a respected colleague that I have worked with. Please message me for his info.

Hi Virginia, Please feel free to reach out. I am an industrial broker in Calabasas and I would be happy to talk to you. 

Hi @Justin Nothem I am a commercial broker and working on a deal with a purchase option right now. Are you buying or selling the property? Principal or broker?

@Pace J. I have a very good friend named Pace Johnson here in California. Funny coincidence. 

Nonetheless, I would look into the online auction sites (ten-x.com , auction.com) or call brokers in the area not asking for them to list but asking them if they have anybody that might want the properties at a discounted price "as-is".

 This is true. "Viability" not the best choice of words, but easy to tell something is dramatically overpriced if it's listed as a 2% cap in a market that trades similar product at a 4% cap.

@Account Closed cap rate is often used as a shorthand way to evaluate whether a viable investment or not. I do not recommend. People like simplicity, it's the most basic and simple way of evaluating the approximate purchase price. 

If I live in West Los Angeles and know that based on comps, office buildings of similar condition and lease status to the one I am evaluating sell at approximately a 7% cap, I can expect the one I am evaluating to trade somewhere in the same range. If it differs, it is either incorrectly priced or there's some dirt to dig up on the property.

A building in Los Angeles may sell at a 3% cap rate while the exact same building in Albuquerque may sell for a 13% cap rate. There's a lot to unpack here but a lower average cap rate is often a sign of the local investment community's belief that the property will appreciate. Because the property is believed to appreciate, they are not concerned so much with the NOI of the property.

My advice would be to use a commercial realtor. Do the math on how much a commercial realtor is going to cost you, and how much money you will be losing out on if it sits vacant. Typically a commercial real estate broker will have a list of people who would work in that space. A list that is only generated by having boots on the ground and calling people all day long, not by craigslist.

You can expect a commercial broker to charge 5%-6% of the total lease consideration. For example, $500/month for 36 months would be a total lease consideration of $18,000. The if the commission agreement is for 5% (2.5% to Lessor's broker, 2.5% to Lessee's broker) that is only $900 paid out. Or less than 2 months if it stays vacant.

In my experience, the most successful commercial real estate investors use brokers to lease out their vacant space. The 5% is a small price to pay for all of the market knowledge and access to their rolodex.