2 things that derail most sale-leasebacks

You’ve opted to own the location from which your company operates. A great move by the way! A limited liability company was formed and owns the building. Presumably, the LLC’s members are similar to that of the occupants.

You struck an agreement with the resident – your enterprise – to pay the LLC an amount of money each month for the use of the address. In effect, you’re paying yourself. It’s a beautiful thing! Tax benefits are afforded for the owners of an LLC, such as depreciation of the asset, write-offs for any mortgage interest, property taxes, and operating expenses. Over time, the LLC’s investment appreciates.

Your occupying business pays rent just as it would to a landlord who has no stake in the company. Plus, because the owner of the real estate and operation are synonymous – if business ebbs and flows – so can the rent you pay yourself monthly. We are fortunate to have such a situation.

We own the building from which we ply our brokerage. Each month Lee & Associates Orange – the occupant – pays Taft Lee LLC – the owner – a dollar amount that provides a nice return on our investment. However, during the term of our ownership, we have deferred rent increases, banked reserves for a new roof, and kept the rent commensurate with market conditions. We can do this because we are the landlord AND the tenant.

Generally, a business or ownership transition will create a commercial real estate decision. As an example, if you acquire a competitor, will the real estate you own and occupy adequately house the marriage? Conversely, if you sell the business, does the buyer of the business have their own location? Thus making your asset an excess?

An election to move your enterprise out of state requires some time to facilitate and turn the equity in the real estate to buy your new location. In all cases, as you can surmise, you’ll make a decision. Keep the building or sell it.

When selling is chosen, one of the strategies employed is a sale-leaseback. By definition, a sale-leaseback inserts an investor to replace the LLC ownership. The group – your company – stays in the building, and in the leaseback, pays rent to the investor.

With that as a backdrop, let’s discuss what can derail most sale-leasebacks.

The operating company cannot afford market rent.

Remember. One of the reasons you own your business location is to provide flexibility during tough times. Maybe the amount allowed to your operation to pay is well below what comparable rents are. This is done because your two interests – business and building – are satisfied.

In order to maximize the value of your investment, however, you’ll need to shore that delta. Someone buying your real estate – and relying on rent – is only concerned with a return on their money. Therefore, the price an investor will pay you is based on a formula known as a capitalization rate or cap rate.

A cap rate is determined by net income (rent less expenses) divided by purchase price. The relationship is inverse: the lower cap rate, the higher the price. But, the higher the rent, the higher the price … within reason. If the company housed cannot afford market rent, the sum an investor will pay will result in a lower value.

As a seller, you’d like to max your sale proceeds but don’t want to saddle the business with an unsustainable monthly rent. A true dilemma!

What to do with the proceeds?

Your ownership LLC with a related company paying you is a tidy investment. If you sell the real estate, where can you reproduce the return? Remember, you’ll need to accomplish a tax-deferred exchange into another income property or be faced with a whopping tax bill.

In the three transitions above – acquire a competitor, sell the business or move out of state – a sale-leaseback could ensue. However, each presents complexity.

Buying a competitor is easy, especially if you need more space. No lease-back is needed. You simply sell the smaller and exchange into a larger. Boom.

A business sale – especially if the business buyer doesn’t need your real estate – is challenging. You’ll have to fill a vacancy by selling or leasing. The timing of an out-of-state move works great for a sale-leaseback. Simply, point A is sold. A lease is created for two years. Point B is bought and rented short-term while you prepare to move your enterprise. The lease expires on Point A and the relocation to Point B is completed.

More on these later.

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. 

Reverse damage of politicians, special interests: John Cox

For decades California has been run by career politicians and insiders. Together they have created a state that only the wealthy and well-connected can afford to live in.

California has the highest taxes in the country and is one of the country’s least affordable places to live.

Homelessness is out of control. California is home to nearly half of our country’s unhoused people. The politicians have spent billions, but the problem is getting worse every day.

We are facing our worst ever wildfire season. We have a water shortage caused by mismanagement. California is losing population for the first time ever as the middle class flees.

In short, career politicians are running our beautiful state into the ground.

I have a vision of a California run for the benefit of its people, not the politicians. As an outsider, I’ll always put the people first.

We will cut taxes 25% across the board, while closing corporate loopholes that benefit the well connected. We will reduce the cost of housing for the middle class by reforming the rules and regulations that get abused to drive up housing costs. We will squeeze every penny out of  state government to lower taxes and keep them low.

As a CPA, I know how to pinch pennies and make them work for people. That’s the kind of person we need in the governor’s office.

We will also cut homelessness in half by getting the homeless into treatment. We can’t just build housing for the homeless. They’ve proven they won’t use it. We have to address the root causes. That’s something the politicians have refused to do. The result: homelessness taking over our streets. That ends through treatment.

We will reduce wildfires by managing our forests better and better utilizing our government resources used to fight the fires. We can add more reservoirs and use desalination to solve our water shortages. California needs an outsider who will implement creative, yet realistic solutions to fix our problems.

As a businessman and CPA, I’ll make it happen.

Most importantly, we will put an end to the insider back door deals that result in Gavin Newsom attending a lobbyist’s birthday party in violation of his own coronavirus rules. I will bring decency and fairness back to government. I guarantee you that no lobbyists will be inviting me to their parties. And I wouldn’t want to go if they did.

California is the greatest state in our country with the greatest resources. The career politicians and insiders, in both parties, have squandered it. As a businessman and CPA I’ll help bring California back to what it should be.

John Cox is a businessman who ran for governor in 2018.

Real estate news: 20-story office tower in Orange sells for $150 million

City Tower, a 20-story, 435,177-square-foot high-rise office building in Orange, has been sold for $150.5 million.

The building at 333 City Boulevard is home to UC Irvine Medical Center, Enterprise Rent-A-Car and Sedgwick and Spaces.

The transaction, which was brokered by Newmark Knight Frank, is the largest office sale in Orange County this year, according to the firm.

The property got a $3 million renovation that upgraded the lobby, fitness center, conference center and main entry.

Newmark’s Kevin Shannon, Paul Jones, Brunson Howard, Ken White and Brandon White represented the seller, Pacific Oak Capital Advisors. The buyer was Opal Holdings, a New York-based real estate investment firm.

El Verano, a new, 54-unit affordable and supportive housing apartment complex for the homeless and low-income seniors, is now fully occupied at 1248 E. Lincoln Ave. in Anaheim. Innovative Housing Opportunities converted the blighted Sandman Hotel into a three-story community with Spanish architecture. (Courtesy of Innovative Housing Opportunities)

Anaheim housing project fully occupied

El Verano, a new, 54-unit affordable and supportive housing apartment complex for the homeless and low-income seniors, is now fully occupied at 1248 E. Lincoln Ave. in Anaheim.

Innovative Housing Opportunities converted the blighted Sandman Hotel into a three-story community with Spanish architecture.

The city bought the hotel in 2017 for $3.5 million along with parcels at 1239 and 1249 E. Broadway. IHO, which proposed spending $23 million for the conversion, holds a 55-year lease with the city. Federal funds and tax credits were used to develop the apartment in addition to a $2.5 million loan from the city.

Amenities include a community room, computer room and dedicated health office. All the services are aimed at helping residents remain housed and to “age in place with dignity and grace,” the organization said in a statement.

El Verano is next door to IHO’s Rockwood Apartments, another multifamily complex that provides housing and support services for 48 formerly homeless families, as well as 15 permanent supportive housing units for Mental Health Services Act (MHSA) residents living with mental illness.

Newport Beach-based CapRock Partners has bought 21 acres of land in 10 parcels for the development of three industrial buildings totaling 441,554 square feet in north Las Vegas. (Rendering courtesy of CapRock Partners)

More deals in Vegas

Newport Beach-based CapRock Partners has bought 21 acres of land in 10 parcels for the development of three industrial buildings totaling 441,554 square feet in north Las Vegas.

CapRock bought the land for a Class A project that should break ground in early 2022. Its completion is expected by the end of that year.

The new project, named CapRock Tropical Logistics Phase II, is the second phase of the adjacent CapRock Tropical Logistics, a two-building 1.1 million-square-foot logistics complex that is nearly complete.

Together, the two projects will encompass 105 acres or 34 legal parcels. CapRock said the first phase is 100% pre-leased and should be ready in the fall.

Newport Beach-based Alere Property Group, a developer and investor of industrial real estate, has bought a 72,051-square-foot, single-tenant distribution warehouse in Rancho Cucamonga. Terms of the transaction were not disclosed. The building at 8700 White Oak Avenue is occupied by Bluestar Express Group, a third-party logistics user. (Courtesy of Alere Property Group)

Inland buy for Alere

Newport Beach-based Alere Property Group, a developer and investor of industrial real estate, has bought a 72,051-square-foot, single-tenant distribution warehouse in Rancho Cucamonga.

Terms of the transaction were not disclosed.

The building at 8700 White Oak Avenue is occupied by Bluestar Express Group, a third-party logistics user.

Nick Velasquez and Mike Hartell of Colliers International represented the seller and Alere in this transaction.

The Bascom Group in Irvine and Spirit Investment Partners of Stamford, Conn., have bought a 221-unit apartment complex in Evanston, Ill., for $49 million or $222,217 per unit. The complex, called 415 Premier, is a 17-story high-rise built in 2008.

Bascom buys in Chicago area

The Bascom Group in Irvine and Spirit Investment Partners of Stamford, Conn., have bought a 221-unit apartment tower in Evanston, Ill., for $49 million or $222,217 per unit.

The building, called 415 Premier, is a 17-story high-rise built in 2008.

Dan Cohen of CBRE represented the seller. Peter Marino, also of CBRE, arranged the acquisition financing through Rialto Capital Management.

Buchanan Street Partners in Newport Beach has bought Village of Rowlett, a 249-unit apartment complex in Rowlett, Texas, a suburb of Dallas, from Catalyst Urban Development. Terms were not disclosed by the firms. (Courtesy of Buchanan Street Partners)

Buchanan Street buys in Texas

Buchanan Street Partners in Newport Beach has bought Village of Rowlett, a 249-unit apartment complex in Rowlett, Texas, a suburb of Dallas, from Catalyst Urban Development.

Terms were not disclosed by the firms.

The 3-year-old Village of Rowlett includes 16,000 square feet of retail space plus a mix of studios, one-bedroom, two-bedroom units, in addition to 27 two-bedroom townhomes. The property was 96% occupied at the time of sale, Buchanan Street said.

Amenities including a swimming pool and sun deck, camp-style fire pit, urban community garden and yoga/fitness center.

Aaron Kirman Group in Los Angeles has named former NFL cornerback turned real estate agent Morgan Trent as managing director for its expansion into Orange County. Trent, who started his real estate career in Orange County at The Related Companies in 2012, co-starred with Kirman on the CNBC show. (Courtesy of Aaron Kirman Group)

‘Listing Impossible’ team expands into OC

Aaron Kirman Group in Los Angeles is looking for more luxury sales in Orange County, naming former NFL cornerback turned real estate agent Morgan Trent as managing director for the new venture.

Aaron Kirman, founder and president of the firm and president of International Luxury Estates at Compass, is the host and agent that stars in “Listing Impossible” on CNBC. Season One included a listing in Dana Point that had toiled for three years before Kriman sold it for $9,995,000 in October 2018.

Trent, who started his real estate career in Orange County at The Related Companies in 2012, co-starred with Kirman on the CNBC show.

So far, there is no office space for the Orange County division. Trent, the firm said, will be focused on growing his team first.

On the move

Jim and Margaret Turco have joined the Mission Viejo office of Berkshire Hathaway HomeServices California Properties. The Turcos were among the founders of Surterre Properties, which has offices in Laguna Beach, Monarch Beach and Newport Beach.

Troy Dao has joined The Saywitz Co. in Newport Beach and will help the brokerage expand its business development group and its brokerage operations. He has a background in customer service and sales.

Troy Dao has joined The Saywitz Co. in Newport Beach. Patty Arvielo, co-founder and president of Tustin-based New American Funding, has been named one of the Most Powerful Women in Mortgage by Mortgage Banker.

Milestones

Patty Arvielo, co-founder and president of Tustin-based New American Funding, has been named one of the Most Powerful Women in Mortgage by Mortgage Banker. This is the first time that Arvielo has been honored by the magazine. First American, with 179 locations and some 4,800 employees nationwide, said it wrote 170,000 loans for $43.4 billion in 2020.

Good works

Sea Pointe Construction, a residential design/build firm in Irvine, has donated new cabinetry and has partnered with Galleher to provide flooring to renovate a unit at Thomas House Family Shelter in Garden Grove.

This is the second unit Sea Pointe has renovated at Thomas House during the COVID-19 pandemic.

Thomas House has provided over 1,500 families with rent-free shelter with a goal of helping residents maintain permanent housing while monitoring and bettering their personal finances.

Real estate transactions, leases and new projects, industry hires, new ventures and upcoming events are compiled from press releases by contributing writer Karen Levin. Submit items and high-resolution photos via email to Business Editor Samantha Gowen at sgowen@scng.com. Please allow at least a week for publication. All items are subject to editing for clarity and length.

 

Bellator 263: AJ McKee says his time has arrived vs. Patricio Pitbull

A.J. McKee rolled up to The Forum last week styling and profiling. Out of a Maybach strolled the 26-year-old MMA prodigy, decked out in a blue throwback Lakers Kobe Bryant jersey and sporting Louis Vuitton shoes, a flashy watch on his wrist and a $20,000 chunk of gold dangling from his neck.

In the background was an enormous banner adorning one of the infamously red exterior walls of the famed Inglewood sports arena. On one side of the poster was Brazilian two-time featherweight champion Patricio Pitbull, the undisputed king of Bellator’s 145-pound and 155-pound divisions.

On the other was the undefeated local kid who made good, from his wrestling days at Long Beach Poly to headlining Bellator 263 on Saturday night.

At stake in the Bellator Featherweight Grand Prix final is not only Pitbull’s belt, but a cool $1 million.

A.J. McKee and his father, Antonio, started this journey more than six years ago, with a just-turned 20-year-old A.J. winning his debut via submission at Bren Events Center in Irvine and audaciously barking out the champion’s name – Patricio Pitbull, who was seven months into his first featherweight title reign.

And now McKee doesn’t know if Saturday’s pay-per-view headliner ranks as the most significant fight of his career, let alone in the hallowed halls of The Forum.

“Being here last time, fighting on the card with my dad, that was a big piece. I still don’t know if winning this world title will be bigger than that for me,” the 17-0 McKee said of the September 2019 card when he and his father each were victorious at Bellator 228.

“But it’s neck and neck, man. I feel like this is more of a calling. This is what I have to do. This is what needs to be done.”

THE CALLING

For Antonio McKee, serving dual roles in his son’s life isn’t an issue due to his ability to compartmentalize being A.J.’s father and coach.

“When we’re at home, we don’t talk about fighting. In the gym, listen to me, respect me, I’m your coach,” Antonio McKee said.

A.J. McKee was among several local kids who began wrestling at a young age under his father’s watch in the family garage.

Antonio, though, says he didn’t push his son into wrestling or fighting.

“Pushing him to wrestle and wanting him to wrestle are two different things,” Antonio McKee, 51, said. “I wanted him to take from wrestling what you get: the discipline, the sacrifice, hard work and you have to be mentally prepared. Those are all the fundamentals of life.”

As for pursuing a career in MMA, A.J. McKee told his dad, who has trained the likes of former champions Rampage Jackson, Chuck Liddell and Tyron Woodley, he was fighting one way or another – on the streets or in the cage.

Antonio acquiesced. Not that he pampered his kid.

“I said, ‘I’ll see you Monday’ and I made him throw up for a whole week straight,” he said. “I tried to torture him to make him not want to do it. Unfortunately, I’m barking at the wrong tree. At that time, it was unfortunately, ‘OK, this is the route you want to take? This is the hard way.’ But then I built him on that. So what did I expect?”

A.J. McKee has heard the stories of his father’s difficult upbringing and rough-and-tumble 20-year MMA career, from fighting for fringe organizations for peanuts starting in 1999 to getting one shot in the UFC – a unanimous-decision loss to Jacob Volkmann at UFC 125 in 2011 — before being cut.

His respect runs deep for his father, a fighter in every sense of the word.

“He’s in my corner. My dad wants nothing but the best for me,” A.J. McKee said. “I see that, him being a first-generation fighter, fighting for $50, and me coming in for $1,500. He sees the way the sport is. So his eyes have always been open.”

THE CLICKING

The Bellator World Featherweight Grand Prix brought highs and – despite a perfect 3-0 run – lows for A.J. McKee.

After his highlight-reel 8-second knockout of Georgi Karakhanyan at Bellator 228 – the same card in which his then-49-year-old dad, fighting for the first time in nearly five years, recorded a second-round TKO of 47-year-old William Sriyapai – A.J. McKee took on Derek Campos at Bellator 236 in December 2019 in Hawaii.

In the first round, A.J. McKee attempted a spinning heel kick and landed awkwardly and fell. He fought the rest of the fight with a torn lateral collateral ligament in his left knee. He fought through it and submitted Campos via armbar in the third round.

That’s when it all clicked.

“It kinda showed me, man, this isn’t guaranteed. In a split of a second, your entire career could be over,” said A.J. McKee, who didn’t fight for another 11 months while he recovered from surgery.

“He was sitting there screaming my name and nobody was there, in the bed crying because he couldn’t wipe his own (butt),” his father said. “Family values start to mean more. Real friends start to take accountability for being real friends, and he saw how many there were. And it was easy after that.”

A.J. McKee returned to the cage in November, needing just over a minute to submit former Bellator bantamweight champion Darrion Caldwell in the semifinals with an out-of-nowhere modified neck crank.

Which means he has had eight months to prepare for Saturday’s finale and nearly four months to prep for his opponent. Pitbull (32-4) cinched his finals berth with a first-round guillotine choke of Emmanuel Sanchez in April.

The 5-foot-10 McKee will have an 8-inch reach advantage over the 5-foot-6 Pitbull, who has won seven consecutive title fights and hasn’t lost in five years while often finding a way inside against taller opponents.

“He’s not going to understand the game standing. He’s gonna try to put me on the ground,” the 34-year-old Pitbull predicted. “He believes he has the advantage because he’s longer. To me, it’s nothing.”

Antonio McKee expresses complete confidence in his son’s prospects Saturday – “You match up striking, range, speed, size, strength, youth. Only way he loses is he gets clipped,” he said – but at the same time admits to being nervous because this camp has gone so smoothly.

“This is the first time I can say I’ve seen my dad nervous,” A.J. McKee said.

The calling – and the call-out of Pitbull – have been a long time coming.

“For me, it’s everything. This has all been in the making,” A.J. McKee said. “I really don’t know what’s to come after, but what I’m looking forward to is becoming a world champion and sharing that moment with my dad.”

Bellator 263

Main event: Champion Patricio Pitbull vs. A.J. McKee in the $1 million Bellator Featherweight World Grand Prix final

When: Saturday

Where: The Forum, Inglewood

How to watch: 4 p.m. prelims (Bellator and Showtime YouTube); 7 p.m. main card (Showtime)

15-year fixed mortgages drop to record low of 2.1%

Where is the bottom?

This week the Freddie Mac primary market mortgage survey shows the 15-year fixed hitting a record-low of 2.1% with a 0.7-point cost.

One year ago, during Wave 1 of the COVID-19 triggered refinance mania, the 15-year was 41 basis points higher at 2.51%.

The 15-year fixed is currently available at a 1.75% interest rate in California if you are willing to pay some points. Because mortgage sizes are much larger in California, mortgage pricing is always better than Freddie’s national polling shows.

The average 30-year fixed is currently at 2.8%, Freddie Mac reported, just 15 basis points above its Jan. 7 all-time low of 2.65%

Before I explain what is going on, let me first eat some crow.

Just two months ago, I wrote a column predicting the 30-year fixed rate would hit 3.5% by year end. There have been just a handful of times in the past 50 years where mortgage rates have climbed about three-quarters of a percentage point in five months, according to Freddie Mac historical data.

In most cases, that occurred when hyperinflation was in the wind. The inflation pressures in front of us today are nowhere close to hyperinflation. So, the chances of us seeing 3.5% by year end are slim and none. Crow it is.

Obviously and quite unexpectedly, a new COVID-19 virus variant named Delta is clobbering many corners of America. New cases are rapidly mounting. Masking up is the new mandate-again.

Uncertainty is never good for the economy. Uncertainty tends to drive rates down. Are we going back to lockdown mode? When will this new strain get contained? What is next? Will we see a wave of some other variant when this one comes to an end?

Here’s what we do know: Federal Reserve Chair Jerome Powell announced Wednesday, July 28, that the Fed will continue to buy at least $40 billion of mortgage-backed securities each month until substantial further progress has been made toward maximum employment and price stability goals.

Remember, Fannie and Freddie dropped their one-half point “adverse market” fee for refinanced mortgages a few weeks ago. That saves borrowers $2,500 on a $500,000 loan.

With home prices and home appreciation exploding, Black Knight reported America had $8.1 trillion of tappable home equity as the first quarter of the year.

Black Knight’s Optimal Blue refinance rate-lock data shows 42% of all rate locks were for cash-out refinances during the first three weeks of June.

As of July 21, Black Knight data shows nearly 14 million borrowers could save almost $300 per month by refinancing. Of those, more than 1.8 million were in California. The estimated savings to California refinance borrowers was even higher at more than $400 per month.

Local refinance activity over the past few years has been remarkable.

Starting in the first quarter of 2019, refinance volume in Los Angeles, Orange, Riverside and San Bernardino counties increased 10%-20% each quarter through December 2020, according to Attom Data Solutions. The exception was in the first quarter of 2020, when volume dropped as COVID-19 first hit.

If you want to take cash-out, you should determine if you are better off refinancing your first mortgage or getting a home equity line of credit, or HELOC.

Generally, if you have a really good rate right now and you don’t want to pull out much cash, a HELOC might be a better choice. Most banks don’t charge anything to get a HELOC.

The downside of a HELOC is rates and payments may adjust monthly.

If you are looking to drop the rate you pay for a fixed loan, you should be able to get around 2.875% on a 30-year fixed and 2.375% on a 15-year fixed without any closing costs. This assumes excellent income, credit, and equity.

The biggest break is if you can go from a 30-year fixed to a 15-year fixed. You can typically reduce your interest rate by 0.5% by taking on the shorter-term mortgage.

Freddie Mac rate news: The 30-year fixed rate averaged 2.8%, 2 points higher than last week. The 15-year fixed rate averaged 2.1%, a record-low that’s 2 basis points lower than last week.

The Mortgage Bankers Association reported a 5.7% increase in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $55 more than this week’s payment of $2,253.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without closing costs: A 30-year FHA at 2.5%, a 15-year conventional at 2.375%, a 30-year conventional at 2.875%, a 15-year conventional high-balance ($548,251 to $822,375) at 2.5%, a 30-year conventional high-balance at 3.125% and a 30-year fixed jumbo at 3.25%.

Eye-catcher loan of the week: A 15-year fixed mortgage at 1.75% with 1.625 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.