Unsolicited offers abound in hot market with almost no supply – Daily News

on Mar26
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With the unprecedented shortage of industrial buildings to buy, abundant capital available and a steady drumbeat of increased demand from investors and occupants, we find ourselves in an acute seller’s market.

Many of our clients have received unsolicited offers at eye-popping figures! By unsolicited, I mean this — no listing, no marketing, no real thought about selling but the offer arrives in your inbox. Frankly, these numbers are so appealing, it’s caused many to pause and consider accepting the windfall.

But, there are challenges that must be overcome. What are those, you may be wondering? Allow me to expand your understanding.

You still need the building in which to operate your business. A wise decision was made some time ago to house your business in owned commercial real estate. Through the years, the operation has paid you rent, mortgage balances have been retired, tax benefits achieved and appreciation has occurred.

But the fact remains, so long as your enterprise requires an address, continuing to own and occupy the building is generally the best alternative.

Sure, you could structure a leaseback, stay put and take advantage of the lofty offer. Just make sure your operation can withstand the likely bump to market rent your buyer will likely require. Or, you could relocate the business to a cheaper market. Problem is, this “cheaper market” would likely be in a different state. And the same imbalance of supply and demand likely exists there, too.

Finally, many approaching retirement years believe this is a great time to sell the company and the real estate and retire.

What will you do with the money? In most ownership structures, the sale of a capital asset triggers a significant tax obligation. Yep, Uncle Sam wants a taste of your proceeds. First off, the gain — the difference between your net purchase price and basis — will be federally taxed at 20%.

Next, any depreciation taken through the years will be recaptured at 25%. California will tack on 13.3%, and finally, expect a cut by the Affordable Care Act of 3.8%. All in, you’re looking at close to 40% of your gain paid in taxes. Some folks simply believe the best way to go is to pay the levy and be done.

With the crazy numbers being offered today, there are still a lot of options remaining. If the thought of a 40% hit is too much, you can certainly defer the tax through several means such as a tax-deferred exchange, a partial exchange, a Delaware Statutory Trust or an allocated LLC. All of these deferral strategies require specialized advice through your CPA and real estate counsel.

Certainly, none of us can predict how long these unprecedented prices will continue. Will world events such as the war in Ukraine, rising interest rates, another pandemic, or something unforeseen crater our market with uncertainty? Normally, a vacancy factor of around 5%-6% provides a good platform for buyers and sellers to transact.

By that, I mean 94%-95% of our industrial stock is occupied, leaving a slim balance in play. Today, depending on the location in Southern California, we’re talking 1% or less.

Skewed is the market. A catastrophe indeed would precede any return to normalcy.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104

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