Promus Commercial Real Estate News

June 2010

Working Hard to Find that Silver Lining

It’s not surprising that San Diego’s commercial real estate market is in the tank right now. With a vacancy rate of over 15% – and another 3% vacant but under existing leases – our industry in San Diego County is limping through its worst conditions in 16 years. It helps explain why no permits were requested for building in San Diego County in March – the first time that’s happened in over 20 years.

A special report in the San Diego Business Journal noted there are experts predicting the need for office space will decline as more people work from home and the use of office spaces become more flexible.

How depressing!

Still, there is good news to be had. Consider, for example:

• The downward trend in industrial real estate vacancies
• The additional lender financing now available
• The increase in small business clients looking for office space

Building permits are up almost a quarter percent in March, with unemployment claims dipping. Add to this increases in local stock prices and help-wanted advertising and an additional 5,000 (over the previous month) now employed locally, and there is reason to be cautiously optimistic. And with John Walsh, president of DataQuick, seeing local residential real estate markets returning to stability or even appreciation this year, can we be far behind?

Yes, there are projections that there’s another 12-18 months before all the excess inventory has been absorbed. Simultaneously, though, building purchases are picking up as investors and business operators come off the sidelines. Buildings along major transportation corridors are currently enjoying the greatest success.

As the Journal reported in an earlier study, “preliminary data so far in 2010 indicates the dollar volume for commercial building sales transactions — industrial, office and retail — is up 47% from the first three months of 2009, even though the number of transactions is down 18%.” Leasing activity around the county is also up 7% from a year ago.

With SANDAG predicting an additional 700,000 residents living in the county over the next 20 years, and rising demand for healthcare expected to increase regional need for medical space, this may actually be the right time to jump back into the market.

There’s activity beyond healthcare, by the way. Plan to also keep an eye on computing technology providers, energy-related firms, machine-tool sellers and construction companies gearing up for better times, as reported by Mike Brown of Western Alliance Equipment Finance.

So while we’ve all been forced to be more flexible in the short run in order to successfully get through this morass, there may actually be light at the end of this tunnel.

Let us show you how to make the most of the opportunities coming your way shortly »

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Doing Your Due Diligence

Lauri Greenblatt Hines, CPM, CCIM
President, Promus Commercial

The white-hot commercial investment market we experienced for several years ended in 2008 and we’ve spent the past two years to the doldrums. Yet anyone who wants to own more income property in this area should be dusting off their wallets and jumping back into the game.

Prices are down, inventory is up, and the fundamentals that make San Diego a terrific investment locale – geography, climate, limited supply and large demand – are still in place. Added together, these are good reasons to keep and increase your investment dollars here.

That said, if you find a deal that makes sense and can get it under contract, you are only halfway to the finish line. Due diligence still counts, even in a buyer’s market. Having recently completed some large due diligence projects for our clients, this is a topic near and dear to the hearts of everyone at Promus Commercial.

Here, then, is my list of Top Ten Tips for conducting an effective due diligence:

LAURI’S DUE DILIGENCE TIPS

1. A common lease option gives the tenant the right to cancel provided the tenant pays all unamortized leasing commissions and tenant improvements. If any of your leases have that provision, make sure you get the cost of these items from the landlord prior to close so you will know what to charge a tenant exercising the cancellation option.
2. It seems obvious, but we still see it being overlooked all the time – check leases on California properties for Prop. 13 protection, which limits property tax increase pass-throughs to tenants due to the sale of the building.
3. Check the leases for future rent credits and future (or mid-term) tenant improvement allowances. Who will be responsible for the cost?
4. Is a capital reserves program in place? It is a liability to the property, similar to security deposits, and should be reconciled by the seller prior to COE.
5. Are there personal guaranties in the lease that burn off after a certain amount of time? If so, check the tenant’s payment history to make sure you won’t be stuck with a deadbeat tenant just as their personal liability goes away.
6. Conduct a quick CPI audit on leases with CPI increases to make sure they have been correctly calculated. We have run across CPI increases that were four years in arrears, and others that were charged using a completely different index than that specified in the lease – all of which can leave you in a tough position with the tenant unless you can document the prior landlord’s actions in this matter.
7. If you are analyzing an office building, make sure you have well documented records of each base year at the building. We recently experienced a situation where 62% of the building was on a 2007 base year – and our clients were only provided with the January – June operating expense numbers. Needless to say, this made calculating operating expense pass-throughs quite challenging.
8. Check security deposits on the rent roll against security deposits on the lease. If there is an anomaly, it may be that the tenant is/was in default and a portion of their security deposit was applied towards past due charges. Make sure you receive documentation if this is the case, as you will otherwise be responsible for the amount of security deposit on the lease.
9. If there are certain one-time rights in a tenant’s lease – the right to expand, for example, or the right to lease adjacent space, confirm that these rights have not already been exercised. If they have, obtain written evidence of the event and make sure it is addressed in the tenant lease estoppel.
10. Determine in the contract who will be responsible for calculating CAM or operating expense reconciliations, and if it is you, make sure you have everything you need to complete the reconciliations. At a minimum, a detailed general ledger and copies of all paid invoices should be provided by the seller.

As an unofficial rule number 11, we recommend that you use two sets of eyes to conduct your due diligence if at all possible. No matter how thorough you are, “lease fatigue” eventually sets in and you may overlook something important if you are reviewing multiple leases. We suggest teaming up with someone else in your company, or enlisting the help of a trusted and experienced real estate advisor, to assist with the process. A few dollars invested in staff or consultant time now can save major dollars down the road!

For a private assessment of the difference that due diligence can make for your company and investments, contact president Lauri Hines directly at 858-751-6331.

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PROMISES MADE. PROMISES KEPT.

We’ll make this easy for you: Promus Commercial is about a LOT more than just commercial property management.

» Due diligence

Checking leases, security deposits and reserves are probably more important than checking for termites, but odds are good you’ll do the latter faster than the former. Yet Promus provides more than the checklist – we deliver the expertise to take advantage of opportunities and catch issues before they become problems.

» Consulting

There are times when property owners need an unbiased opinion to quantify the value of an investment or justify a decision. Whether you’re looking for an hourly assignment or a monthly retainer, count on the professionals of Promus Commercial to fulfill your needs.

» Commercial Condo Conversion

Whether you’re motivated by profit or flexibility, the Promus team is perfectly positioned to help you sell off some or all of your rental property by converting it to commercial condominiums. The best part is that it’s easier than you thought. We can even help manage the property after the conversion has been completed.

» Expert Witness

Our experience is your advantage, since retail, industrial, commercial leasing, management and association management are all core areas of expertise at Promus.

» Lease Administration

From our first day on the job, Promus Commercial has one thing in mind – LEASING! Renewing and improving existing ones and implementing new ones. Haven’t hired us yet? Ask us to review your existing tenants to see how to maximize current profits.

» Site analysis and acquisition

Even the best properties being purchased under great circumstances for a wonderful price may have issues. We know what to look for, and how to find it before your new asset becomes a liability.

» Maintenance

The expert, licensed vendors who work with Promus Commercial provide a high level of 24/7 service across a range of disciplines at rates that are 20-30% lower than those charged in comparable trades.

» Construction Management

Whether you’re renovating or repositioning a shopping mall or incorporating residential and commercial units into the same property, turn to the Promus Pros for those extra insights into ways of increasing long-term profitability.

» Marketing

From lease-up of new construction to repositioning under-managed buildings and management of mature properties through extensive rehabilitation of managed units, Promus is there with extensive experience in leasing properties through all phases of the product life cycle.

» Commercial Association Management

Years of working with commercial associations have given us the experience every association can benefit from, including administration, financial services, operations, maintenance and property inspection. Let us organize your annual meetings, oversee your insurance, keep your records and coordinate your board of directors. Budget supervision and monthly financial reports just became a snap. All this - plus ways to say up to 30% on contract costs – with a single phone call!

» Daily Operations

This is our bread and butter. Here our professional staff provides all the support functions you'd expect for anticipating and addressing any property’s needs. Accounting. Human resources. State of the art software. Leasing. As the heart of the Promus machinery, here’s where you’ll find the training, the tools and the support to get the most from every day for your investment.

Still unsure how Promus Commercial fits into your company’s future? Contact Scott Cook today at 858-751-6324 and tell him what concerns are on your mind.

We’ve Got Work To Do

California Assembly Bill 1103, signed into law in 2007, is expected to be taking effect on January 1, 2011.

The new law requires commercial building owners to disclose energy-use data, and should make properties more competitive, while giving potential buyers and renters a more precise way to comparison shop for energy-efficient spaces.

Bill 1103 was part of a legislative package that Governor Schwarzenegger called his “Green Building Initiative,” Signed in December, 2004, it called for the state to lead the way in designing, operating and re-engineering its buildings to make them the most resource-efficient, energy-efficient and healthful public buildings in the nation.

The Green Action Team – a Cabinet-level group – is working to implement the Green Building Initiative by reducing carbon emissions by 1.8 million metric tons by 2020.

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2010 Commercial Property Assessment Appeal Filing Period Rapidly Approaching

Ken Sullivan, Principal
RPC Property Tax Advisors, LLC

In this market of declining commercial property values, reducing one’s property tax liability is a year-round process which begins with the January 1st tax lien date, continues with the informal review period, with the formal filing of an assessment appeal application being the last opportunity for 2010 tax relief.

The informal review period in San Diego County runs through May 30th which for all intents and purposes is over for 2010. This allows us to petition the county assessor’s office to review our client’s property assessments for the upcoming fiscal year. The county assessor is not required to review the property’s assessed value during this period if there have been no previous reductions in assessed value. However, it is in the assessor’s interest to review the request and make the adjustment to the roll during this period. This allows the assessor’s office to avoid spending the time responding to and preparing an assessment appeal defense.

Having a property reassessed during the informal review period greatly expedites tax savings. If the county assessor grants an informal review, the taxpayer can see relief with a reduced 2010 tax bill. Unfortunately, most counties are inundated with 2009 appeal filings and they must complete the 2010 roll values for this fiscal year by July 2nd so most do not have the time or personal to perform these reviews.

CA. R&T code 1604c requires the county assessment appeals board to hear an assessment appeal application within to 2 years of formal filing date.

Since county assessors’ offices are not required to grant an informal review and a commercial appeal can be lengthy and complicated it is helpful to have an experienced property tax advisor in your corner. 21 years experience and hundreds of successful appeals make the difference in obtaining the largest reduction in the shortest time frame.
The RPC team includes former county assessors, commercial appraisers and skilled appeal board tax agents who know what the various parties require for successful property tax reductions.

Since 1989, RPC has been trusted to find and return every available taxpayer dollar when it comes to commercial real or personal property taxes. RPC services all 58 California counties.

You can reach Ken Sullivan online at www.rpcpropertytax.com for a free property tax review.

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