July 2019

A Window of Opportunity for Commercial Real Estate

As we all know interest rates are low!   Commercial real estate loan rates have been on an average of 5% to 7% depending what the buyer is financing.  Now they are in the 3% range. Whether you are a seller, owner or buyer this may be the opportunity of a lifetime!  Never before in my 45 years in the commercial real estate business have I envisioned interest rates could be in the 3% range.

The Industrial real estate market vacancy rate in Los Angeles was at 1.9% in the 2nd quarter of 2019.  Ecommerce growth is creating a big demand for industrial space.   As a result, the low interest rates combined with shortages in industrial real estate inventory are pushing up values.  Sales and construction of industrial and logistics warehouses in many cities drove up the assessment value growth in Los Angeles County, according to an article in the LA Business Journal dated July 22 titled, “Value Add.”

Therefore, sellers in this marketplace have a chance to obtain prices for their properties at record levels. Buyers on the other hand will be able to lock in low interest rates for 10 years which will provide the buyer with the ability to purchase properties and amortize loan balances more quickly. Existing holders of commercial real estate will be able to refinance their property at low interest rates and increase their cash flow.

Retail and office real estate properties are more prone in this market to have higher vacancy rates and may benefit from lower interest rates. Holders of retail properties and office buildings may be able to install improvements at lower interest rates and make their real estate more desirable and perhaps lease their properties sooner.

This window of opportunity may only last until the election in 2020. Low interest rates may begin to rise in 2021 whether or not the current administration remains in office.

Tenant Beware when Signing a Commercial Lease - Good Tips

The tenant must perform his or her due diligence inspecting the premises in order to avoid expensive pitfalls that may occur prior to signing a lease for a commercial property.  The lessee should not delegate the due diligence to the agent/broker but take command to investigate the condition of the premises for its use themselves.

The following is a minimal list of what the future lessee should investigate:

1.    Visit the city Building and Safety Department plus the Planning Department which will inform the tenant if the building has the proper zoning for their use.

2.    At the Building and Safety Department, request permission to inspect the permit package.  The permit dates to repair and upgrade the building will determine if the building permits are recent (minimum age is 5 years for current upgrades).  Almost all buildings would obtain permits within the last 5 years for miscellaneous repairs.

3.    A licensed contractor should inspect the premises. An experienced contractor should be able to point out areas that should require further investigation in order to protect the new tenant from possible matters that may arise.

4.    Always employ an HVAC contractor and an electrical contractor to determine if the condition of the installation of the heating, air conditioning and electrical systems are appropriate and up to code.

5.    An inspection by a roofing contractor is always advised if the property is under a Triple Net lease.

6.    Always request from the owner if there are any potential hazardous materials on the site or if any have been removed in the past.  Items such as mold, fungi and asbestos should always be disclosed by the landlord even if those materials have been removed.

Never lease a property on an as is basis/where is basis.  When the tenant visits the property and spots items that may be of concern before the lease is signed, he or she should have the owner exclude those items from the as is condition.
 
Warranties in the commercial real estate industry for repairs or replacement are usually 6 months on the HVAC system and 30 days on the other components of the building.  The future tenant should obtain longer warranties from the owner in my opinion. Consequently, the tenant should be very cautious if the owner does not grant any warranties as to the condition of the property for lease.

The landlord may express that everything was built to code at the time of the construction of the building and its improvements.  What does the meaning of “up to code” represent to the potential tenant?

An electrical contractor may have made repairs to the property and brought those repairs up to current codes.  The issue or definition of code has been interpreted that “up to code” means a permit has been taken out.  

I have observed that a great deal of repairs made to a property are made without a permit.  Tenants and owners try to avoid permits due to their cost, longer construction time and the possibility that a building inspector may discover items that were constructed without permits.  As a result, tenants always beware when signing a commercial lease.

 

“Lee has a tremendous breadth of knowledge in the real estate field. He assisted me with a case which involved combing through a great deal of information, and he was very thorough in navigating his way through the sea of documents with a good understanding of the facts. He was always mindful of trying to be as efficient as possible by focusing on the most relevant information rather than delving into every single document. I would absolutely work with Lee again in the future.”  
Eugene Kim, Attorney, Stream Kim Hicks Wrage Alfaro, PC