Industrial Basics – Why Care About Ceiling Height?

You’ve probably seen ceiling height called out in listings for warehouses and manufacturing buildings. But why should that number matter to you?

What is “clear ceiling height”?

  • “Clear ceiling height” is the height at which product can safely be stored on racking. It’s also defined as the height of a building from the floor to the bottom of the lowest-hanging item on the ceiling, such as sprinklers or HVAC ducts.

Why should ceiling height matter to you?

  • Warehouse capacity is determined by clear height. So, a tenant can increase the capacity of a warehouse by 10% to 25%, just by increasing clear height from 32 feet to 36 feet. After all, true warehouse capacity is how much product can be stored in a three-dimensional space—a measurement of volume (cubic feet) rather than area (square feet).

How have ceiling heights changed over time?

What impact do ceiling heights have on building operations?

  • A pallet of goods generally measures 64 inches, meaning that a building with 32-foot ceilings can stack between four to six pallets high. A building with 36-foot ceilings can provide between 10% and 25% more capacity. But the cost of the additional height has to measured against the cost of a larger building with lower ceilings—assuming that a user could actually make use of the higher ceilings.
  • Low ceiling heights affect how much inventory can be stored in a building, as well as what kind of equipment and machinery can be used or moved around in a building. Many manufacturers have equipment that requires high ceilings—think monorail systems to move merchandise for processing.

Can low ceiling heights be remedied?

What’s the takeaway?

  • During site selection, ensure the team you’re working with is thinking creatively in order to identify the space you need for your operations. Ceiling height is one of many factors that can help you maximize a warehouse’s full potential.

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. You can read the original here. 

4 Reasons why you benefit from Exclusive Representation in Commercial Real Estate

In a commercial real estate transaction, a seller can leave a lot of money on the table if the buyer is well represented and they are not.  Worse still, the seller may look to the buyer’s broker for advice and mistakenly believe that they are being represented and receiving advice that is in their best interest.  How do you know if you need independent representation?  Every seller can benefit from having their own representation, and I will lay out a few reasons why below, as well as a few case studies.  

“Plans fail for lack of counsel, but with many advisers they succeed”   

A few years ago, an owner who we will name “Steve” owned an automotive shop on a busy downtown corner.  He was approached by his neighbor, who wanted to buy his building for what Steve believed to be a fair price.  Steve accepted the offer and closed on the property.  A few months later, he realized that due to the capital gain on the fully depreciated building, his taxes were nearly a quarter of the sales price!  Not only had he underpriced the building, but after paying off his mortgage, the burden from tax bill started a process which ultimately led to his bankruptcy.  If a good agent had advised him, they would have advised him of his tax implications, as well as making sure that the sale price was in line with the market.

About two years ago, a woman we will name “Sherry” owned a home in a downtown neighborhood.  Her family was growing, and she wanted to purchase a larger home.  She put an offer on a nearby home which was for sale by owner.  Neither buyer or seller had any real estate experience, and they used a form they found online.  Once the property was under contract, she put her home up for sale by owner.  Within days, a buyer’s agent brought her an offer on her home. Sherry wanted to make sure that the contract was contingent upon her closing on the other property, which the buyer’s agent assured her it was.  There were some complications with her loan, and the seller of the property she was buying refused to give her an extension—and she was forced to terminate.   When she asked the buyer’s agent about terminating the contract on her home, she refused, and said that they would sue for specific performance if she did not sell.  Ultimately, she was forced to sell her home under market value, and rented an apartment across the street.  If a good agent had been involved, Sherry would not have been forced to sell her home for below market value, and likely would be living right now in what she considered her “dream home”.

4 Reasons to have independent representation

  • Representation
    • The buyer’s agent has a duty of loyalty to protect their client’s best interest. Some brokers may attempt to practice what is called Dual Agency.  Dual agency is a slippery slope and frowned upon by most brokers.  Often what happens is that one party is treated as a “client”, and the other as a “customer”—meaning that client receives the duty of loyalty while the customer does not.  All these details should be clearly disclosed to both parties, and failure to do is an egregious license law violation.
  • Better Leverage
    • Another reason to have separate representation is for negotiating leverage. Commercial Real Estate agents, especially CCIMs, are trained to help negotiate the best possible price and terms.  If you are communicating any personal details to the buyer’s broker, then they have a duty to tell the seller—which may completely remove any negotiating leverage you may have had.  Think about it—any personal details which may make the Buyer think you need the money more than they need the property WILL be used against you.  Your exclusive agent’s duty is to protect those details, while working to tip the scales in your favor.
  • Pricing
    • If a buyer’s agent brings you an off-market offer on a property, how will you know if that price represents a fair market offer? Think about it—if someone is willing to go to the trouble to contact you, to do the due diligence and make an offer, could there be someone out there who would pay  a little more?  In my experience, off-market properties seem to sell for about 20% less than they might if they were properly marketed.  Your agent’s role is to make sure that you are priced in accordance with the market, and not leaving any money on the table.
  • Contracts & Due Diligence
    • Your agent should be familiar with the documents and amendments you are reviewing and will be able to advise you about their implications. They will be able to suggest language that would better protect you, or additional clauses to add. They should also remind you to talk with your CPA to determine what your tax consequences will look like.  You agent will also be able to help with due diligence items required by the Buyer—documents such as leases, tax returns, plats–as well as interfacing with government agencies for things such as permits, zoning details and environmental concerns.  They will also be able to connect with the appraiser, and hopefully give them what they need to appraise your property for the highest appropriate amount—something that a Buyer’s agent could not do.

We would love to hear from you!  Please comment below.   Have you ever been in a situation with an unrepresented party?  Or have you ever been in transaction where you lacked appropriate counsel? Do you have any horror stories from real estate deals where good advice could have made a difference?  

Additional Resources: 

SIOR – How to select a commercial real estate broker

Founders Guide – How to choose the right commercial real estate broker

Commercial Property Advisors – Choosing the right commercial real estate broker

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. 

(c) 2020 Jonathan Aceves

The Four Primary Uses of Sale-Leasebacks

The Four Primary Uses for Sale-Leasebacks

All business owners should be familiar with the Sale-Leaseback as a tool for raising capital and potential exit strategy. As opposed to bank financing, the Sale-Leaseback can have some advantages, and today we will explore the four different ways they can be used by a business owner.

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

Financing

Sale-leasebacks are a popular means for companies to fuel growth by moving capital out of real estate and into their principal business.  Often, releasing capital in real estate is more affordable and has better terms than bank financing.  With bank financing, you may only be able to release 75-80% of the equity in your real estate, and that loan will likely come with a 3-year balloon payment.  And often the appraised value of the building is the value of the vacant building.  With a Sale-leaseback, a business owner can tap into 100% of the equity in the real estate, with no balloon payment, and often the value of the NNN lease to an investor is higher than the appraised value of the empty building (depending on the owner’s creditworthiness and balance sheet).  Also, a risk of bank financing is that if the appraised value falls below the agreed-upon LTV, the loan is in default and immediately called (think 2008).  The sale-leaseback puts the market risk on the new owner.

Improved Returns

If the returns from a company’s principal business are higher than the returns on the real estate, it often makes sense to move equity out of real estate and invest it in the company’s core business.  The goal is always to maximize return.  For example, if the business is able to gain a 20% return from day-to-day operations, and the ownership of the real estate where the business resides is only netting an 8% return, returns would increase if the business could divest of the real estate to allow for greater investment in the core business.  Through the signing of a long-term lease, the real estate can be sold, the business remains in operation in its current location, and operations could conceivably be expanded with the opening of a new location or other operational expansion. 

Balance Sheet Improvements

As a seller looks to exit their business, it can become important to improve financial statements.  With this strategy, the seller replaces a fixed asset with a current asset. This increases the current ratio (current assets/current liabilities).  Sometimes referred to as the Working Capital Ratio, investors see this as an indication a company’s ability to service its short-term debt. 

Exit/Repositioning

A Sale-leaseback can be a useful tool for a business that knows it wants to move from a given location into another market or trade area in the future.  It can also be a means to exit from an overly specialized or obsolete building.  An example could be a prison or a hospital, or a retailer realizing that growth is moving in a given direction and determining that in 10 years it will move to follow growth, or that they will centralize their operations in a new building. 

We’d love to learn from your experience! Have you ever considered a Sale-Leaseback? As a broker, have you ever put one together? What have mistakes have you made/lessons learned?

This post originally appeared on Jonathan Aceves’ Blog and is republished with permission.

The Four Primary Uses of Sale-Leasebacks

The Four Primary Uses for Sale-Leasebacks

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

Financing

Sale-leasebacks are a popular means for companies to fuel growth by moving capital out of real estate and into their principal business.  Often, releasing capital in real estate is more affordable and has better terms than bank financing.  With bank financing, you may only be able to release 75-80% of the equity in your real estate, and that loan will likely come with a 3-year balloon payment.  And often the appraised value of the building is the value of the vacant building.  With a Sale-leaseback, a business owner can tap into 100% of the equity in the real estate, with no balloon payment, and often the value of the NNN lease to an investor is higher than the appraised value of the empty building (depending on the owner’s creditworthiness and balance sheet).  Also, a risk of bank financing is that if the appraised value falls below the agreed-upon LTV, the loan is in default and immediately called (think 2008).  The sale-leaseback puts the market risk on the new owner.

Improved Returns

If the returns from a company’s principal business are higher than the returns on the real estate, it often makes sense to move equity out of real estate and invest it in the company’s core business.  The goal is always to maximize return.  For example, if the business is able to gain a 20% return from day-to-day operations, and the ownership of the real estate where the business resides is only netting an 8% return, returns would increase if the business could divest of the real estate to allow for greater investment in the core business.  Through the signing of a long-term lease, the real estate can be sold, the business remains in operation in its current location, and operations could conceivably be expanded with the opening of a new location or other operational expansion. 

Balance Sheet Improvements

As a seller looks to exit their business, it can become important to improve financial statements.  With this strategy, the seller replaces a fixed asset with a current asset. This increases the current ratio (current assets/current liabilities).  Sometimes referred to as the Working Capital Ratio, investors see this as an indication a company’s ability to service its short-term debt. 

Exit/Repositioning

A Sale-leaseback can be a useful tool for a business that knows it wants to move from a given location into another market or trade area in the future.  It can also be a means to exit from an overly specialized or obsolete building.  An example could be a prison or a hospital, or a retailer realizing that growth is moving in a given direction and determining that in 10 years it will move to follow growth, or that they will centralize their operations in a new building.