Whether you should buy or lease your business property depends on a number of factors, but no matter what you decide, both leasing and buying property are not without their pitfalls. Those pitfalls can cost your company thousands of dollars on a monthly basis, eroding your profits and your company’s overall value. Buying and leasing require proper due diligence. On this edition of “Deal Talk,” Tony Guglielmo, owner of Allied Commercial Real Estate in Southern California, shares his expertise and real-life examples of business owners who were the victims of their own bad decisions and what you can do to avoid the same mistakes.
At 15 years I've seen a lot, done a lot, made some mistakes, did a lot of things right. But it takes making those mistakes to learn what to look for.
- Tony Guglielmo
Jeff: Tony, give us kind of a quick 30,000-foot elevated snapshot of who you are and what Allied Commercial Real Estate is all about, where you guys are located, who you serve, all the basics.
Tony: Okay Jeff. So we're actually in Ontario, California. We serve primarily commercial real estate needs. So that could include purchasing of an industrial or office, or retail property. It also includes leasing as well so we do a little bit of both, sales and leasing. Our territory coverage typically goes from east of the 57 out to about Banning\Beaumont area and down towards Corona, and a little bit up in the high desert but mostly the Inland Empire are our coverage and service area.
Jeff: Now, if you're wondering, Tony sounds like a young man and he is, but Tony, the experience that you have really brought to bear over the years, and that includes using technology to your company's best advantage, is really something to talk about here. You have been in the market for some time and you've seen some changes. You've seen a lot of things happen really since the economy has emerged out of the great recession and has tried to emerge out of the great recession. There have been a lot of changes in Southern California in terms of real estate, all of the warehouses and all of that space that had been available once upon a time back in 2010-2011, that space is really starting to once again rise to premium level, isn't it? That space is just not available anymore.
Tony: Yeah, absolutely. It's interesting, I started my career in 2000, so 15 years ago is when I got my license. And I would say, it was kind of the beginning, looking back in retrospect it was the time when we were pulling out of the doldrums of the 90s. Everybody was kind of hesitant and we were slowly building steam. And I got to ride one of the best real estate waves there ever was from 2006-2007. And then the bottom fell out from under it, so there was a lot of overbuilt construction I would say in 07 and 08 and it just needed to kind of catch up to it. So you're right, in 2010, we were kind of in the depths of the doldrums of the great recession. But now we're filling up. The positive absorption we have is almost filled up completely. They're starting to build more.
Everybody was kind of hesitant and we were slowly building steam.
Jeff: And we're just talking about warehouse here, but Tony let's go ahead and we can broaden our conversation just a little bit. Real estate is really, really important when you are a business owner. Let's start with the sellers first of all, with those people who've been in business. And whether they're successful or maybe things have become stagnant and they're leaving the industry and they're selling off. What do you really think is key to owners maintaining or getting the best value that they possibly can when they sell their business in terms of their real estate? Is it all still really about location as far as that goes, Tony, in your estimate?
Tony: Yeah, there's no doubt that location is key with any type of real estate transaction. Some more so than others. I would say if you're talking about a retail business, traffic counts, and location and quality of construction is paramount for retail. You can have an industrial building down a back street, around the corner that's older but it allows the business owner to store their goods securely in there, that could be all they need. Location is key for retail and for office, not so much for industrial. Industrial people are looking more for functionality. Ceiling height, the dock height doors, power, racking systems, different needs for different people.
Jeff: Is there ever a time, Tony, when you'll have to sit down and have a heart to heart talk with a business owner about whether or not it's best in fact that he or she buys the property that they're considering versus leasing it for example where you'll just come out and say, “This is really what you should do” or “This is what you should consider.”
Tony: Yeah. I try my hardest not to tell a business owner what to do and what's best for them. I try to give them both the information needed to make an educated decision on both directions. We put together a purchase versus lease analysis. And there's so many factors that go into each of those that you need to consider. With the purchase, when you're lining it up and you're looking at your monthly cost, with a purchase you got to consider the down payment that is going to take to purchase the building, that's coming out of pocket. You got to consider any kind of maintenance issues that you would have when you otherwise wouldn't have it as a tenant. What we try to do is lineup those numbers and then put in an educated guess on how it's going to appreciate, so when you go to sell it five, 10, 15 years from now what you going to expect to have selling it versus a lease scenario where you just put your monthly cost and you ... You put a side by side analysis there and then a business owner needs to decide. Let's say for example they're thinking of buying a 10,000 square-foot industrial building and it's going to cost them a million, two million to purchase it, or it's going to cost them $8,000 a month to rent it. They got to look at, "Hey, maybe we're going to grow out of this in two years, so there's no reason to buy it right now, because we don't want to be stuck trying to get out of a pre-payment penalty on the loan in two years when we need a 20,000-foot building.” So for that particular business I'm going to paint the picture of both scenarios but probably recommend that they lease at this time.
I try my hardest not to tell a business owner what to do and what's best for them. I try to give them both the information needed to make an educated decision on both directions.
Jeff: I was going to say that was going to be my next question, Tony, do you find that in the majority of situations that you've been involved in a new business or a business that is a young business, maybe having started within the last two or three years is going to be more inclined to want to lease space at least initially?
Tony: Yeah, absolutely. New businesses, unless you have a trust fund backing you, it's pretty hard to purchase a building nowadays with banks. They want to see a history of three years of tax returns for your business. They want to see revenue growth. One of the factors they consider is how much you have been paying rent over the past few years to see if you can absorb the cost of a mortgage. So it's very tough as a new business to purchase a property unless you can put a sizable down payment. But once you've leased for a few years and you've proven yourself as a business owner and as a viable business it's a lot easier to go and purchase at that point because you know what you need and the banks look favorably upon you at that point.
Jeff: Correct me if I'm wrong, this is just kind of off the top of my head, even if the location may not be necessarily the most desirable, if you're a new business and you haven't really had the seasoning, your company hasn't had the revenues that you think that you should have maybe after three, four, five years, and you've purchased the property and you need to ... You finally said, “I have done all I can do. I'm not comfortable with this, I need to sell my business.” It's going to be a lot more difficult to sell a business that is not doing well when there is a piece of property that comes with it.
Jeff: Let me ask you this then, I own my own business but I have the privilege of working from my home office. I don't have to go out someplace every day and go into a shop, unlock the door and walk in with all my employees. My question is how different is it for those folks who are listening for the first time considering buying commercial property, how different is it than it is to buy a home, which many of us have had the experience of doing not once but multiple times.
Tony: Speaking from experience because I do both. I have a home that I own and I also bought the building that my business is in. And it is a different animal so to speak. For me the nice thing about owning ... And keep in mind, I'm no genius. I bought my building in 2007, exactly the wrong time so I hope you know not take my advice. But as we emerge from this downturn and I still own this building. And every time I make a mortgage payment I'm paying down principal on my loan that sometime down the line I'm going to have a retirement. To many every mortgage payment I make is like me putting money into my retirement account. That's the way I look at it. It gives me satisfaction that I am putting away for the future rather than just paying a rent payment where it's going to the landlord and it goes away. With owning you definitely have benefits of ownership, and a couple of others. Tax benefits, you get to depreciate the asset on your tax returns and you get ... What I picture down the line is when I outgrow this space I keep the property and I rent it out to somebody else and it becomes an income producing property for me. To me I like the idea of ownership. And it's much different than a home because a home you're going to live in, you need it. You need to show up, you need to have your kids go to the schools. It's never really going to be an income producer whereas a commercial property can be.
What I picture down the line is when I outgrow this space I keep the property and I rent it out to somebody else and it becomes an income producing property for me.
Jeff: We're going to get more into some of the specifics behind the purchase of a piece of property for your business. We're talking with Tony Guglielmo. He's the owner of Allied Commercial Real Estate in Southern California's Inland Empire. My name is Jeff Allen. You're listening to Deal Talk. We're going to be right back after this.
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Jeff: Welcome back to Deal Talk, Jeff Allen here with my guest Tony Guglielmo, broker and owner of Allied Commercial Real Estate in Southern California and he's got one of those designations here, CCIM. Tony, correct me if I'm wrong. This is something I had to Googlize here and I believe that stands for Certified Commercial Investment Member, is that right?
Tony: That's correct.
Jeff: Perfect, great. I get the award of valor and honor for the day. And Tony is going to talk to us now a little bit about some of the pitfalls. Tony, during the commercial break we were just chitchatting a little bit. There are a number of things that you have witnessed or that you have kind of come to understand from your dealing with a number of different clients, different industries, who've purchased or leased real estate and problems came up that were unanticipated, or there were issues that came up during discussions that people don't even really consider, a business owner may not consider or think about. Tell us about some of the things that you witnessed that a business owner should probably get some thought to when they’re looking to expand into a new location.
Tony: Okay Jeff. At 15 years I've seen a lot, done a lot, made some mistakes, did a lot of things right. But it takes making those mistakes to learn what to look for. That's why I do recommend if you're serious about buying or leasing to talk to a real estate professional with a good level of experience. So when you're looking out for things that could go wrong ... I'll give you some examples. A retail user, like a restaurant space I worked on. They had a great center, great traffic, great exposure, foothill boulevard, everybody loved it. But I brought to their attention that on a 4,000 square-foot restaurant there was about 10 spaces right in front of the restaurant. The rest of them were a minute walk away. When you're talking about retail type stuff you need to have adequate parking very close to the entrance of your business. It'll discourage people from going and patronizing your business. Retail, something to look out for is obviously exposure but also the parking. A lot of people don't think about that. When it comes to industrial, if you're a manufacturer or you're a distribution guy, we've got power requirements. So some buildings you'll need to look out for the amperage in the building. So there's an amperage and a voltage. Some machines you need 400 amps of power but it's got to be on the 277-480 volt power. I've seen people buy a building, spend a bunch of money, and then realize they can't use the power on their machines that they've got. And it was going to require a $30,000 Edison upgrade to their facility and Edison wasn't going to pay for it. That's one thing to look out for when you're talking about industrial. An office guy, you’ve got an insurance office and you're going to have eight employees. You need to consider where can they go to lunch, how far is it from their homes, all these factors you need to think about before committing to a five year lease, or committing to purchase a property.
That's why I do recommend if you're serious about buying or leasing to talk to a real estate professional with a good level of experience.
Jeff: Just think about it, once you’ve signed on a dotted line, you're kind of on the hook at that point and you need to make a go of it and make it work out, and that means even if things aren't 100 percent right, and it may never be 100 percent exactly right but you want to make sure you go in and have your bases covered in advance, really important things to think about. You may see a building and be like, "This is awesome. Can you imagine what it's going to looking when we get done with it.” But Tony, it's funny, you're taking about the 10 spaces in front of the restaurant building. And at that point I can imagine the owner saying, "Shoot, I wouldn't mind coming to this place and parking on the street and walking up. It's a short enough walk to do. People need their exercise” but you just can't look at it that way. You have to think more about your clients and down the line. It really is important.
Tony: One the thing, Jeff, I want to point out on the pitfalls, and it's becoming more and more of an issue now than it ever has been, and that's checking with the local government, the cities, and the zoning and the planning department of the cities in which you're looking to locate your business. I'll give you an example. We're working on a deal out in San Marino last month. The guy comes in, he's a contractor, and he wants to park some trucks behind the fence yard, and he thinks nothing of it. He comes in and signs a five year lease. Gives the landlord his deposit and first month's rent. Then he goes down to get the electricity turned on and they tell them, "Do you have a business license?" He says, "No." He goes down to get a business license. They tell him that that property doesn't allow outside storage and they're not going to give him a business license so he can't turn his power on. So he goes back to his landlord, wants his money back and the landlord says, "No, you signed the lease. I'm keeping your money. I'll let you out on the lease but I'm keeping your first month's rest and your security deposit." It cost him about $8,000 of a mistake. The moral of the story is check with the local city planning department before you sign anything.
Jeff: Excellent points. This is stuff that most people I think would probably need to consult again with a professional such as yourself, Tony, or any other professional in their market wherever they are because all laws, rules and regulations are different from city to city. But these are important things to remember regardless of where you are. Tell us a little bit about currently ... I say currently, you and I are speaking here in the fall of 2015 and much of the information we share with our listeners is going to be important no matter when they listen to the program. It could be four or five years from now. But in any case, typically, what is expected when someone wants to come in and purchase property as opposed to lease? Is there a minimum down that's usually expected by the bank? Does it just really depend on the lender? Tell us how it works.
Tony: There's lots of different loans for businesses. The most popular loan that people use to purchase real estate is what's called an SBA loan. They have two types, the 504 and 7A. Both of those loans require a 10 percent down on the value of the property. So you're buying a building for a million dollars, it requires $100,000 down. There's additional fees that go on top of that. I like to tell people you need about 13 percent. If you're looking at cash on hand in order to get a building. That's a standard SBA loan. In order to do that you have to have a business history of two to three years of operating history to get those types of loans. So that's what I was saying earlier in the show you do need to probably lease when you get started. There's also other types, and that SBA loan by the way you need to occupy at least 51 percent of the property. So if you're looking at a strip center and you're only going to occupy 10 percent of it, or you're looking at buying a bigger industrial building you're only going to occupy 40 percent of it you can't get an SBA loan. The typical conventional loans as they call them could be anywhere from 25 percent to 40 percent down on a conventional basis. When the bank are looking to underwrite you to give you a loan they're looking at your cash flow and they're seeing how much, when you get all your income you write off all your expenses, they're looking at your net operating income, and they're seeing how much of that new debt service is it going to take of your cash flow. And if you're cash flowing 20,000 a month and the mortgage is only going to cost you 5,000 a month, they're probably going to give you the loan.
The moral of the story is check with the local city planning department before you sign anything.
Jeff: Let's talk about leases now because there are already some people scratching their head thinking, "I can't do that. I don't have that kind of money that I can put down to buy a piece of property right now.” Like I said, all markets are a little but different as far as affordability is concerned. Talking about leasing, what kind of different leasing plans have you seen? Obviously, you lease property. Tell us a little bit about how people can lease and the flexibility that they have now with today's leases.
Tony: Okay. One more thing on the SBA purchase, those can range anywhere from $100,000 all the way up to 10 million. I was just using the million dollar scale but you could get a smaller SBA loan too as well. On the leasing side of things, a leasing is on a case by case basis because every landlord's a little bit different. But customarily what you see with a lease is you're going to need your deposit which is equal to typically one month's rent. If you have very poor credit score, FICO score, they may want two or three months of that rent upfront as a security deposit which sits in their bank account while you're occupying the space. So if you default they can utilize those funds during the time in which they're evicting you because you didn't pay them. Let's say you got good credit, you're looking to lease a 5,000 square-foot retail unit, you're probably going to need one month's security deposit and first month's rent. It's becoming less and less of a tenant's market and more of a landlord's market. But you can still get on a three year deal probably one or two months of free rent, on a five year deal maybe three months of free rent. That can all be front loaded to give you a chance to cover your moving cost, get your startup going, get your phones hooked up, move your furniture, so a lot of landlords, you got to write a check for first months and security, but then they'll give you two months free where you don't have to pay anymore until those two months are up. That’s all stuff that can be negotiated, and again, why I recommend working with a real estate professional who knows what's going on in the market place at the time in which you're looking to do it.
Jeff: How common is it, if it's even done at all, Tony, that a landlord will assist, defer some of the cost of making improvements in order to suit the needs of a new tenant coming in?
Tony: Yeah, it's common. They call it a TI Allowance, Tenant Improvement Allowance. There's some landlords that they'll do the work for you, some of the larger landlords, because they want their contractor who they know is licensed to be in their building do the improvements, they'll go ahead and they’ll pay for it. But then they'll want to collect it back over the term of the lease. You typically want to recover that. So if you're going to come in, you want to put a new bathroom over here and a new wall here, say it costs 10,000. They'll take that cost over the three year term in the lease ...
Jeff: Then they'll spread it.
Tony: Yeah, then spread it, and it's called amortizing the cost over the term of the lease. So there's some landlords that like to do that. There's other landlords that don't want to do it at all and they'll say, "Hey, it's $10,000. We'll give you three months of free rent" because they don't want to be responsible in having to coordinate those improvements with you. And if you say, "They didn't do it right, or they didn't do it good." Some landlords will be like, "You take care of all of it. Just let me know when you're done."
I recommend working with a real estate professional who knows what's going on in the market place at the time in which you're looking to do it.
Jeff: Tony, I wish that we had more time because the discussion of real estate and both buying, leasing, selling your commercial property, they really involve more time to kind of go over some of the real fine details, pitfalls, challenges, things like that that people need to be cognizant of as they are in the process of buying, selling, or leasing property, and so we'd like to probably have you on for another show here in the future. But first of all, before we wrap things up, I know that there might be folks who are interested in talking to you about their own situations, they might be interested in expanding their business, or maybe starting their business. They're looking for a piece of property whether to lease or to buy. Who can they call, how can they reach you?
Tony: They can always do a little bit of research about me and our company on our website which is www.alliedcommercialrealestate.com. They could call our office here at 900-786-4300, or they could email me and my email's pretty easy. It's email@example.com.
Jeff: And I know that Tony would love to do business with you. But even if you're outside of the area, if you have a basic real estate question that maybe Tony can answer for you I’m sure that he'd be willing to pick up the phone and talk to you about it, and maybe at least get you kind of started with respect to an education, or informing you about some important things that may very apply to your area as well no matter where you might be listening in this country. Tony, I want to thank you so much for joining us, I really have enjoyed speaking with you and hopefully we can have you back on Deal Talk in the future.
Tony: Sounds good, Jeff. Thank you very much.
Jeff: That's Tony Guglielmo, he's a broker and owner of Allied Commercial Real Estate in Southern California.
You've been listening to Deal Talk presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts like Tony Guglielmo make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening and we'll talk again soon.