Numbers should guide a building owner’s decision to buy or sell — not their feelings. (iStockphoto via Getty Images)
A day for lovers, Valentine’s Day falls every Feb. 14th and is celebrated by couples worldwide.
“It originated as a Christian feast day honoring a martyr named Valentine and through later folk traditions, it has also become a significant cultural, religious and commercial celebration of romance and love in many regions of the world,” says Wikipedia.
And here I thought it was an excuse to stuff my face with chocolate and those cute little heart-shaped candies with the cryptic messages stenciled on their sides. But I digress.
As I ponder Valentine’s Day, my thoughts turn to commercial real estate and the parallels I can draw. Here it goes.
Do you love your commercial real estate holdings?
I was taught early in my career to help buyers divorce (sorry) themselves from the emotion of commercial real estate ownership.
By this, I mean the numbers should guide your decision to buy or sell — not your feelings. This reminds me of an owner I met who owned a freestanding single-tenant building in Anaheim.
The owner was a builder and had constructed this holding. I was engaged to be his agent whenever a vacancy was pending.
Every three to five years the panic would creep in as he knew his cash flow would soon stop, and he’d be forced to suffer a dry spell. His negotiating leverage was lessened, and he ended up with some sketchy residents. All because he needed someone, anyone, to pay the rent.
Over serious objection — after all, this was his baby — I convinced him to sell the building to an occupant and trade the proceeds into a building with multiple tenants.
My theory was if you lost one or two occupants, you still had money to pay the bills — not the in and off light switch of a single tenancy. Reluctantly, he agreed. He’ll tell you that was the best decision he ever made! He now owns three such buildings and enjoys a great retirement.
Send your tenant a valentine.
The new year is in full swing and a good benchmark to finish old business and start new. Many landlords reconcile the past year’s expenses with their tenants in February.
The crush of year-end is solidly in the rear-view mirror and the first quarter is half over.
If you budget your operating expenses such as property taxes, building insurance and maintenance annually, you’ll need to make certain assumptions. Now that the true costs are known, you can bill your resident for underpayment or credit for overpayment.
Second-half property taxes are due in February. Send in your payment this month. The county assessor will love you for it.
Negotiation, compromise, commitment
In both commercial real estate deals and romantic relationships, negotiation and compromise are key.
Whether it’s negotiating terms of a lease or compromising on where to go for dinner, the ability to find common ground is important. Commercial real estate investments often involve long-term commitments, similar to the commitment involved in a serious romantic relationship. Both require careful consideration and planning for the future.
You marry commercial real estate. You date the interest rate.
For those of you who are a bit concerned about interest rates these days, don’t forget your deal can be refinanced once interest rates settle into a more favorable level.
Focus on the basis under which you acquire the buildings. By this I mean the price you pay.
If you can separate your emotions, as discussed above, and instead focus on the income-producing capability of a commercial real estate asset, you’ll make a smart buy.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.
