Moving Beyond the Deal. Why it Matters.
Throughout our many years of leasing office and industrial space, we have learned how important it is to pay attention to the details. One of our recent clients was on a short time frame to move into new office space. We were close to finalizing the terms of the lease. The architect finished the space plan and construction specification. Everything seemed to be on track, right? Wrong. The construction specification called for expensive changes to the ceiling grid that would have resulted in lower quality space. This is one of the many turning points that cause delays and cost overruns when leasing new office space.
At this point in the process, who will take the initiative to review the space plan, construction specification, and match both to the existing conditions in the new office? We will. And we will coordinate the architect, contractor, and building management to make sure the plan is right before its too late. This role is sometimes filled by a project manager. However, in smaller lease transactions there may not be a need, or desire on behalf of the client, to hire a separate project manager to review the details of the buildout and keep it on track.
When leasing new space, be sure that your real estate professional is tracking the details. This will ensure that your project will stay on schedule and on budget. It does matter.
Written By: John Young, CCIM
Moving Beyond the Deal. Why it Matters.
Unlocking the Value of Owner-Occupied Real Estate
Many companies prefer to own real estate that is critical to their business operations. Some privately held companies choose to have the owner of the business purchase the real estate used for their business and lease it back to their company for tax reasons and asset diversification. Often, they have owned this real estate for many years. Thus, it most likely has appreciated in value. Net leased real estate assets with long term leases in place are in high demand today, as investors look for reliable cash flow, tax shelter and a hedge against future inflation. Now may be the time to consider unlocking some of the capital that is tied up in real estate to take advantage of this sellers’ market.
We were recently asked to advise a client that was preparing to sell one of their businesses. They also wanted to sell the real estate that the business occupied. Our job was to figure out how to maximize these sale proceeds. Should they include the real estate in the business sale or sell it as a separate asset?
The buyer of the business was a strong publicly traded company. They were willing to enter into a ten-year lease for the property with options to extend beyond that. Paramount advised our client on what the real estate would be valued at with a long-term net lease in place as well as to what market rent should be and other important lease terms. In turn, our client was able to compare this valuation to what the business buyer was willing to pay for the real estate. We determined that our client would maximize his return by separating the business sale from the real estate sale. Ultimately, our client entered into a long-term net lease with the entity that purchased the business. Shortly after closing on the sale of the business, Paramount listed the net leased real estate For Sale. We quickly sold the property for over asking price.
Does a Sale Leaseback Make Sense for Your Business?
If your company is occupying real estate that it owns but you want to unlock some of the value in the real estate to reinvest back into the business or use for other purposes, today is a great time to consider entering into a sale leaseback. You can structure a long-term lease for the property under terms that fit your business requirements, and then free up your equity through an investment sale transaction. With today’s low interest rates, cap rates on good investment real estate are the lowest we have experienced in decades. This translates into a higher sale price. Most businesses can deploy the cash received from the sale of their real estate back into their business. Thus, making a higher return on this capital then they would have leaving it invested in their corporate real estate.
Please feel free to reach out to a Paramount real estate professional to see if a sale leaseback makes sense for you.
Written by: Fred Hedberg, SIOR
Tax Tips for Owners:
Real estate can be one of the most effective ways of mitigating high tax burdens. Depreciation and Section 1031 exchanges are two major ways that this can be accomplished. Depreciation is the reduction of the book value of an asset over time. Annual depreciation reduces net income, and can create “paper losses” while still producing positive cash flow. The Internal Revenue Code Section 1031 (commonly referred to as a 1031 Exchange) allows the taxpayer to defer paying capital gains tax under certain circumstances. The original asset is “exchanged” for a like-kind asset within a pre-determined time period. This may allow a property owner to reap the benefits of owning a more expensive property (higher rental income) without having to pay capital gains tax on the sale of the first property.
If you see a substantial increase in your property taxes, consider protesting the increase with the city. If you are considering protesting your property taxes, give your broker a call to explore the best strategy to approach. It may be as simple as getting an appraisal but there may be additional steps necessary for a successful outcome.
Tax Tips for Tenants:
If your lease doesn’t allow for you to appeal the property taxes yourself, contact your landlord and see if they are considering a tax appeal. Some leases allow you to file an appeal on your own if you occupy 100% of the building. There are a number of professionals in the area that specialize in this type of work. Be sure to choose an advisor that you are comfortable working with to accomplish your goal.
For more information,
reach out to one of our experienced professionals at:
IOT? WHAT IS IT???
The Internet of Things, or IoT, is a little-known concept becoming increasingly more important in everyone’s daily lives. A technical definition is: cyber-physical systems incorporating internet connectivity with the ability to sense and react to the world in innovative and highly useful ways. In practical terms, you can think of IoT as the fine tuning of efficiency in the supply chain using technology. For example, IoT is the Amazon Echo you use to control the temperature in your home. It’s the smart glasses your warehouse workers wear to guide them in filling customer orders. That’s right. There are glasses worn by humans, that have visual and verbal cues provided by a connected inventory and sales system overlaid on real world pick locations. Think virtual reality glasses, with the actual warehouse racking in full view. Glasses that guide them around the warehouse to pick and fill orders.
Businesses have been searching for ways to acquire more data and use it effectively to reduce costs and increase efficiency. Until recently, the processors needs were too large, costly, and inefficient to scale up. Three new developments changed this:
First, RFID tags – Radio Frequency Identification tags, which are low-power, inexpensive chips that can communicate wirelessly. These allow manufacturers to track inventory location. As well as monitor information such as manufacturing date, expiration date, and warranty periods.
Second, the increasing availability of broadband internet and cellular and wireless networking. These systems provide digital infrastructure for IoT to be more broadly used in manufacturing.
Third, the adoption of IPv6, (internet protocol version 6), which, should provide enough IP addresses for every device the world is ever likely to need.
Now the stage is set to dramatically increase the effectiveness of IoT in at least three distinct areas:
(1) PRODUCTION AND FIELD OPERATIONS
IoT solutions can be used to monitor machine utilization such as run time, operating speed, product output, repair needs, and quality control. The data is gathered in real time then aggregated in the cloud. It is transmitted to shop floor workers’ user interface apps making immediate adjustments. These systems can monitor inventory of raw material on the shop floor and automatically order parts to keep production running.
(2) SUPPLY CHAIN MANAGEMENT
IoT supply chain management solutions monitor the location, status, and condition of every object at any segment of the supply chain (be it an individual inventory item on a warehouse shelf or a truck delivering supplies). For instance, with the traditional supply chain management methods, manufacturers could only retrieve general data such as availability of a part. With IoT in the manufacturing and distribution supply chain it changes everything. Businesses can get information such as the location, condition, shelf life, quality, AND availability of each item.
(3) CONTROL OF OUTSOURCED OPERATIONS
When a business builds or buys a facility in a different city, state, or country, it still needs to maintain quality and production standards. IoT-driven utilization monitoring solutions help industrial companies keep production and distribution on track. They do so by monitoring real-time equipment efficiency metrics without direct access. Smart products located in one city can access and assess real time data in another city. This allows companies to make changes to and keep the distribution process moving effectively and efficiently.
IoT may be the new hot technology buzzword, but there are challenges. Lack of qualified employees who can use it, cost implications, and data privacy concerns are causing businesses to carefully measure the costs and benefits of IoT adoption. In most cases, businesses are taking a step-by-step approach. This ensures they are implementing processes that match company culture and create efficiencies. So, IoT is not yet self-aware, but beware, you will be hearing a lot more about it in the years to come.
Written By: John Young, CCIM
COST SAVINGS WITH LED LIGHTING
DID YOU KNOW?
LED lighting is up to 80% more efficient than traditional lighting such as fluorescent and incandescent lights? 95% of the energy in LEDs is converted into light and only 5% is wasted as heat. Compared that to fluorescent lights which convert 95% of energy to heat and only 5% into light! LED lights also draw much less power than traditional lighting; a typical 84-watt fluorescent can be replaced by a 36-watt LED to give the same level of light. Less energy use reduces the demand from power plants and decreases greenhouse gas emissions. See photo on the right for a side by side comparison.
CODES & CITY REQUIREMENTS
It is important to know the exterior lighting codes and requirements in your city. Cities that realize the importance of this simple step to energy savings are being proactive by outlining specifics on what can be used. Color and output/brightness are two of the biggest factors.
City of Bloomington Requirements: https://www.bloomingtonmn.gov/sites/default/files/52u_exterior_light.pdf
CONSIDER ALL THE FACTORS
Do we need to replace the entire fixture or just the “bulb”? There are many companies out there that will provide you with a free lighting audit showing you the big savings of re-lamping fixtures and all. Make sure you are considering ALL the factors:
Do we have the correct existing fixtures/watts?
Are the usage hours correct/close to your actual facilities hours?
Can you retrofit your current fixtures?
Plug and Play Ballasted LED – swaps out existing linear fluorescent T8 or T5 LED tubes.
Direct Wire LED Tubes– no ballast maintenance needed.
Plug and Play Ballast Bypass – Upgrade by simply changing out the lamp. No electrician cost for the rewiring of the fixture. No voltage issues at the socket, and reduced overall maintenance.
There’s a lot to consider before changing out lighting. Make sure you spend the time finding the right fit for your facility. Some cities may require consumers to re-lamp outdoor fixtures to LED over the next few years. To the contrary, it may be surprising to hear that some cities, Excelsior, for example, prohibits them. With the reduction in energy it seems irresponsible not to consider moving to LED.
For More Information About
Property Management, Contact:
Lisa Borene | Vice President
Property Management Division
EXPECTATIONS YOU SHOULD HAVE WHEN
HIRING A REAL ESTATE BROKER
When a firm engages the services of a licensed real estate broker, what should be the expectation in terms of service and performance? There are many areas to note, but I will mention three that I believe are most important.
Enthusiasm and hard work can make up for many deficiencies. There is no question that those two qualities are critical to any successful real estate assignment. However, people just beginning their careers in the brokerage business don’t start by tackling the most difficult deals. Standard practice in the industry is for a young person to be partnered with, and mentored by, a more seasoned veteran. There is much at stake in any real estate deal. Understanding how to structure the proper deal, familiarity with existing market conditions, editing lease language, and negotiating with area landlords generally is earned by riding the coat tails of a more experienced broker and on-the-job experience. Most of what I have learned over the years has come through time spent with experienced and competent landlords, attorneys and contractors . . . and making plenty of mistakes!!!
Absolutely essential! When any firm, large or small, places its trust in an individual broker, particularly with what’s at stake in a real estate deal, the broker must present an “open book” of himself and the deals he presents to the client. If a landlord is offering a special broker trip or bonus for concluding a deal, the client needs to know. If the broker represents a building they are recommending to the client, the client needs to know. A perceived conflict is sometimes worse than an actual conflict. In every instance, without exception, the broker must do what is best for the client. There should be total transparency from start to finish.
The broker must provide value in every step of the process. If there is no value, what benefit is there to the client? Value comes in many forms and weighted differently by various firms. However, successful firms are focused firms, and taking the time required to complete a real estate deal can easily eat up lots of time . . . and money!!! Expecting a full-time employee with no experience or knowledge to represent the firm’s best interests in the marketplace is foolish. Landlords know their business, and you know yours; and someone needs to be an advocate for the client.
Looking For A Great Real Estate Broker? Look No Further!!!
Fred Hedberg, CCIM, SIOR, Principal
Phil Simonet, Principal
John Young, CCIM, Vice President
Joseph Schultz, Associate
Jack Buttenhoff, Associate
Nancy Powell, Vice President
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FOCUS ON WHAT’S IMPORTANT
Companies searching for new office or industrial space in today’s soft office market, or conversely today’s healthy industrial market and listing brokers and landlords are guilty of this as well… They often tend to focus almost exclusively on rental rate. In other words, the lowest price should be enough to positively influence a tenant’s decision to lease space in a building. The result? We’re “commoditizing” commercial space alternatives while losing the focus on what is right and best for the tenant.
SPACE ISSUES BEYOND PRICE
Let me be the first to say that economics are always important and competing buildings must be reasonably similar. However, economics are not the most important element when it comes to making a real estate decision. I have often told clients, “What difference does it make if the landlord provides the space at no cost, if the space is not functional and does not effectively work for you?” Retail clients generally seem to have a better handle on weighing the intangibles when they make space decisions. They understand that there are issues far more important than price. Issues such as exposure, vehicle traffic counts, ease of access, parking and neighboring tenants. Issues that will impact their long‐term success more than a marginal reduction in their base rental rate.
TOTAL COST SOLUTION
So many components go into a good real estate decision, and price is only one of those components. Tenants need to look at a “total cost solution” rather than just a “rental rate” solution. The latter is the proverbial tail wagging the dog kind of decision, and decisions like that never work well over the long term. That’s why establishing a preliminary budget is critical to the process. So that companies don’t waste time looking at what they can’t afford. Companies often do themselves a disservice by discounting the importance that a well thought out facilities plan plays in their long‐term success. Space, like any other component of a firm’s business plan, should function strategically. Ultimately, ensuring long‐term success for the firm. The list of items that ensure long‐term success generally relegates price to the lower tier of importance.
RANKING CRITICAL ISSUES
Companies must address, evaluate and rank the importance of critical issues. These may include parking availability, access, visibility, building efficiency, flexibility to expand and contract, on‐site or close‐by amenities, public transportation availability, security, sustainability issues, building management, landlord financial viability ‐‐‐ and, obviously, the financial structure. Whether internally generated or broker generated, tenants must understand the total cost of the deal. One deal may provide more dollars for tenant improvements; another deal may offer less tenant improvement dollars but more free rent. Yet another may offer to graduate or step the rent and pay moving costs. And in the end, a simple consideration like ease of client access or proximity to public transportation may trump the lower base rent deal.
Guard against making an impulsive, “head in the sand” facility evaluation. Select a member of your team and a competent real estate broker who will ensure that your firm makes a well thought out space decision, not a decision based on a single issue like rental rate. Make sure you have completed the proper due diligence before signing on the bottom line!
NEED HELP FINDING THE RIGHT SPACE?
Reach out to one of our
TRUSTED. DEDICATED. EXPERIENCED.
brokers at Paramount Real Estate Corporation:
Industrial: Fred Hedberg, CCIM, SIOR, Principal
Phil Simonet, Principal
John Young, CCIM, Vice President
Joseph Schultz, Associate
Jack Buttenhoff, Associate
Office: Nancy Powell, Vice President
LEASE VS. OWN
Many business owners dream of owning their own industrial or office building rather than lease space and pay rent to a third party landlord.
One should consider both the costs and benefits of commercial property ownership to understand if it’s the right financial and operational move for the individual owner (what ever form of ownership it may be) and the company occupying all or part of the property.
Potential Benefits of Ownership:
Better control of building operating expenses
Potential property value appreciation creating more personal wealth
Principal reduction on the loan via rent payments from the tenant
Tax benefits such as depreciation
An excellent marketing tool (the bldg.) demonstrating the success of an organization
May be less expensive than leasing space in today’s market
Potential Costs and Risks of Ownership:
Generally less flexibility to expand or contract space size
Requires equity up front: 10%-25% down payment
Responsible for ALL building maintenance (roofs, parking lot, HVAC, etc.)
Could lose value during a market downturn
A default on the loan may result in foreclosure by the lender
If you are interested in a more thorough review and recommendation on Own vs Lease feel free to call Paramount Real Estate Corporation. We have decades of experience leasing, acquiring and disposing of commercial real estate properties.
Written By: Phil Simonet, Principal | Paramount Real Estate Corp | TCN Worldwide
WHY OPERATING EXPENSES VARY FROM PROPERTY TO PROPERTY?
Have you ever wondered why operating expenses vary from property to property? Energy consumption, service levels and service contracts can vary greatly so it is advisable to secure the details prior to lease execution.
Expenses May Vary
Paramount has been involved in several recent office lease transactions. Many, highlight the need for a close review of the property’s operating budget. Some “full service” leases may include daily cleaning, vacuuming, replacing light bulbs and cleaning your breakroom. And then others may not include these services at all or the services may be on a more limited basis.
Most property owners reserve the right to change rules and regulations and janitorial specs. It’s a good practice for your representative to take the time to request the budget and janitorial specifications. Once you have the detailed information you will be better able to compare properties. After settling on your most desirable property, a close review of the associated lease language is advisable. Although, this may uncover conflicts or missing details that might surprise you during your term. As an example, say your employees prefer to eat lunch in your office suite. As a result, this practice most likely makes it imperative that janitorial specifications would include daily trash service. No one wants to smell that reheated salmon the first time let alone the rest of the week!
Knowing the service level upfront will allow you the opportunity to verify the details are incorporated into the final lease. After all, operating expenses and real estate taxes can be 50% or more of your overall rent and you should only be paying for services you receive.
Need Real Estate Advice. Call Paramount.
TRUSTED. DEDICATED. EXPERIENCED.
Or reach out to one of our Trusted Agents:
Office Agents: Nancy Powell, Vice President | Jeffrey Swanson, Associate
Industrial Agents: Fred Hedberg, CCIM, SIOR, Principal | Phil Simonet, Principal | John Young, CCIM, Vice President | Joseph Schultz, Associate | Jack Buttenhoff, Associate
RELATIONSHIPS BUILT TO LAST
Paramount recently represented the Owner of 1000 West 94th Street in Bloomington. The building is approximately 5,000 square feet, with about one-third of an acre of fenced and paved outdoor storage. The client has worked with the Paramount Team for 20+ years. The relationship began with one transaction in the late 1980s, and has grown substantially since that first transaction. A mutual trust was developed during the first lease negotiation through open communication, honesty, and truly working in the client’s best interests. Over the last 20+ years, many more transactions have reinforced the trust that is the foundation of the relationship.
Too often commercial real estate services are commoditized. Excellent customer service is a lost art that few providers genuinely offer. Business owners generally have multiple projects underway at once. The ability to retain a trusted advisor to handle all real estate related tasks can free up an immense amount of time for busy decision makers. This allows them to focus on running the business. That is not to say that the business owner is uninvolved, on the contrary; constant communication between the client and the advisor is the most efficient way to build trust and create a successful conclusion to a project.
Paramount prides itself on its customer service. The team of Paramount professionals have built a brand with a reputation that Paramount has the knowledge, integrity, expertise, and communication skills to not only satisfy their clients, but go beyond to deliver extraordinary results. Paramount works hard for our clients, large and small, and seeks to obtain relationships built to last.
Written by: Joseph Schultz, East Team Associate