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Once each month, members of The Association of Industrial Real Estate Brokers, AIRE, are responding to different scenarios and offering perspectives relevant in today’s marketplace. AIRE has more than 450 members including brokers, sales people and associates from related real estate firms. Its members command more than 90 percent of all Illinois industrial brokerage transactions.

In this survey, we pose the following scenario:

Consider that you represent a business that is looking to complete a real estate transaction. What type of advice are you likely to give that client about financing and financing alternatives to ensure an acquisition gets completed? If the tenant is leasing, what advice are you giving/measures are you taking to ensure tenant improvements do get done and that the landlord is on solid footing?

Chris Volkert

Senior Vice President,  Colliers International

The first financing alternative is the Small Business Administration program. On the SBA loan portion, the rates are so attractive:  below 4.5 percent. The blended rate, including the conventional bank loan, is below 5 percent. The primary question to ask is whether the loan would qualify. It may take more time and receive more scrutiny, but it is a great program. For larger acquisitions, banks are the way to go; but they don’t just want the loan, they want the business. You can get an attractive deal if you give the bank your business checking account, etc.

The appraisal is another important acquisition consideration. It must be a foregone conclusion that the price you are paying or asking will pencil out in the appraisal. A commercial real estate broker’s role in this process is crucial. Businesses should be working with brokers who understand the market so well, know the comparable data, and have the back up to effectively challenge any lender or appraisal.

John Hauser

Principal, Avison Young

Clients must demonstrate the best financial condition possible. That could mean delaying any transaction now for a stronger financial position in another 12 months. The best deals go to financially strong tenants. Landlords are nervous about doing build out if there is a chance a company could go bankrupt.

At the same time, there are a lot of “zombie” buildings out there; buildings with owners unable to pay leasing commissions or fund tenant improvements. In those cases, tenants can secure as-is deals at a more competitive rate, but one where what you see is what you get.  Landlords may offer above market free rent and let the tenant finance their own build out.  That could be a positive for companies trying to save some money on rent, or a business waiting until its financial situation is better.

Options to consider when a company is purchasing a building and looking to alternative sources of capital are high net worth individuals and seller financing. There are positives and negative in either situation. Private lenders may not require as much equity, but may have stricter guidelines for financial strength. With seller financing, it could be ideal with a motivated seller that doesn’t require all of the money now. While this option is not uncommon, it isn’t exactly mainstream.

John T. Gledhill

First Vice President, CB Richard Ellis, Inc.

The most important tenant advice: get their financial picture in order; establish an easy to understand and clear snapshot. With that taken care of, the user is in a much stronger position to command a better deal—whether leasing or buying a property.

Financing alternatives are available, though not necessarily easy. The number and type of financing options depends on the size of a company’s portfolio, such as whether it is local regional or national in scope. A company’s long-term goals will also impact financing decisions, regardless of size. With larger companies and multi-market operations, we’d examine portfolio solutions tied to a strategic plan such as financing for a package of assets and other options that could look at the entire portfolio. For local companies, looking at individual assets, the primary consideration would be banks—local or regional. The SBA alternative also is an important conversation to have, because putting only 5-10 percent down sometimes really helps a local user accomplish their facility goals.

I do believe that one of the most important developments in the financing, leasing and purchase decisions—and I am not an attorney or accountant—will be changes to FASB 13 taking place between now and 2012. This will be the topic of the day for the next two years because it seriously impacts how some companies look at leases, and may account for them on their balance sheets. It has all sorts of ramifications, many of which will change how clients choose to control their real estate assets going forward.

Daniel P Cawley

Cawley Chicago Commercial Real Estate

Depending on the timing for occupancy, a discussion with the bank in advance of getting started in the process will allow various concerns to be bridged. Timelines are greatly extended for a number of reasons;  loan commitment, approval, appraisal and passing typical inspections (environmental, mechanical, roof, etcetera).  The decision making process for most institutions has become tedious (for good reason) so verifications of financial information may take weeks.  It is also important to have a clear plan about the use of the property and how any improvements will be made and financed. The largest obstacle will be the appraisal and establishing value.  No one knows or is comfortable with value so be prepared for a slow down or death to the process. If you can have the seller finance the project; do that.

As it relates to leasing, have a five year business plan for the company.  Try to find a space that has the majority in the existing layout that is needed.  This serves two purposes: reduced cost to Landlord and better rate for the tenant.  Secondly, fully understand the landlord’s financial position.  Commit to a term that matches your business plan.  Rely on your broker to provide the market expertise on rights of first offer/refusal, termination and lease clauses favorable to you and your growth plan.  Sign as long a lease as makes sense for your company.  Rates have never been this low but be in a property well maintained and a landlord financially sound.

If I can pay ALL cash for a property I’m buying, otherwise I’m leasing!

Mark Barbato

Director and Principal, Nicolson, Porter & List

The impact that lenders are having on the market right now is dramatic.  When the economy slowed a couple years ago, life insurance lenders essentially disappeared from the market.  Banks that were in trouble were spending their time trying to mitigate their losses.  Banks that were healthy were spending their time and funds trying to acquire troubled banks at steep discounts because they could make better yields than making real estate loans.  Literally no one was lending.  Things are improving, but slowly.  If you want to buy something, you need considerable amounts of cash.  Lenders don’t like to loan 70 – 75% in this environment – they are more comfortable at 50 – 60% so you need a lot of cash to get something done right now.  You also need time – lenders are taking longer than ever to process loans, so you need to get your lender involved in a transaction early.  You also need to maintain relationships with multiple lenders – the lending world is so uncertain right now that you can’t rely on just one source, even if you have considerable history with them.

Those are issues facing buyers. The issues facing tenants relate more to the Landlord’s ability to fund fees and improvements.  While it would be ideal for the Landlord to fund those dollars into escrow at the start of a project, that’s not realistic in most instances.  So you need to make sure you’re asking good questions of the Landlord when you’re making the deal.  How is the property financed?  Is there any debt in place?  Has the Landlord funded fees and improvements recently?  Don’t assume that because a Landlord has been in business for a long time or owns a lot of property that they can get something funded.  Plenty of experienced and well-intentioned Landlords are having trouble with their lenders in this environment.  Landlord’s that operate with all cash and no debt are in the strongest position to make their case to prospective tenants.

Tags | AIRE, Avison Young, Cawley Chicago Commercial, CB Richard Ellis, Chicago, Colliers International, finance, industrial, Survey

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