• Fri. May 13th, 2022

What is taking so long with my commercial real estate contract? – Orange County Register

Commercial real estate transactions take time – typically, much longer than buying your family’s home. The best of times, but rarely? The deal is done in 30 to 45 days. More typically? The seasons change without a deal closing.

What begins with a simple framework of find, locate, negotiate, contract, fulfill and close often turns into a quagmire of minutiae. Bring in some professional advisers – lawyers, bankers, environmental engineers, accountants, appraisers, home inspectors, contractors, and commercial real estate agents who all need to have a say – and the complexity begins.

What, you may ask, is taking so long? Do me a favor as I describe a few areas where transaction traffic is reduced like your travels on the 405.

To look for: The available inventory is at its lowest. About 98 out of 100 industrial buildings are occupied. This is great for owners, but if you are looking for a place to relocate your business, you are probably in a hurry to find the right place.

So if you could just go out and check out half a dozen sites and pick the best one, great! The reality is, you can wait months for the right game to show up. The days are getting shorter after all.

Negotiations: Owing to the historically low vacancy rate, homeowners are optimistic. They understand that occupants have very little or no choice. High asking prices follow. Motivation migrates. The concessions are decreasing. Add to that an occupier determined to find an “agreement” and the negotiations end in a dead end. The clock is turning.

Due diligence: Once you’ve found the building of your dreams and made a deal, now you need to determine if you can buy it. Third party reports must be commissioned to investigate all kinds of details – appraised value, environmental history, title condition, roof, air conditioning, structure, seismic, biological, zoning, permits – to name a few.

Normally, transactions are structured with a timeline for completing these studies, but the timelines are rarely generous enough to allow for proper ordering, investigation, reporting, review, and approval. A single shift in the schedule can lead to endless delays and the need to go back to the bargaining table to beg for extra time.

Funding: Many small business owners employ the Small Business Administration to finance their commercial real estate purchases. Depending on the size of the loan and the appetite of the lenders, two approvals are required, one from the bank and one from the federal government.

When we experienced our government shutdown last December, SBA loan approvals came to a halt. Any loan package that was not in the approval queue before the break has suffered an endless delay. Careful consideration is placed on the environmental health of real estate and value as determined by an appraisal. Unfortunately, you and your purchase are on the loan term.

City approvals: The use that will be made of the property as well as any planned changes – office, electricity, warehouse shelving, freezer-refrigeration space – must be examined and approved by the municipality. We once encountered a city approval process that eclipsed a year! This year, moreover, came after the signing of the leases. Fortunately, we anticipated the approval schedule and were able to negotiate a satisfactory structure.

Transition planning: Moving a manufacturing plant can be a bit more complicated than packing your belongings. Combine the complexity of relocation with the inability to be “out of service” for any length of time and planning becomes a challenge.

Please log in next week as I will provide you with some suggestions to roll back Father Time and speed up your transactions.

Allen C. Buchanan, SIOR, is Principal at Lee & Associates Commercial Real Estate Services at Orange. He can be reached at [email protected] or 714.564.7104.

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